Evaluating the impact of global financial conditions on leverage: evidence from Japanese firmsTools Rasheed, Zimna (2021) Evaluating the impact of global financial conditions on leverage: evidence from Japanese firms. [Dissertation (University of Nottingham only)]
AbstractOur study examines the impact of shifts in global financial conditions on leverage of Japanese firms listed on the first and second section of the Tokyo Stock Exchange. It employs a panel data set of 100 firms for the period 2011-2019. We develop three models to investigate our research objectives. The panel data analysis for Model 1 shows global financial conditions having an inverse relation with leverage while Model 2 reveals no evidence of smaller firms affecting differently to the changes in global financial conditions in comparison to large firms. Our third Model investigating the transmission channels measured by the level of monetary policy synchronisation between the countries is insignificant. This implies that the changes in global financial conditions is not transmitted to the economy through domestic interest rates. Our analysis suggests that the negative association of global financial conditions with leverage may not be driven by the changes in federal funds rates per se, but rather due to the country specific factors considering the market instabilities observed in the Japanese economy during our sample period. We find that Japanese listed firms are fairly large in contrast to the listed firms in other economies and most firms relies on retained earnings including cash holdings to reduce cost of debt. We believe that global financial conditions may not be a strong factor that influences the leverage of firms in advanced economies. Our study provides an insight to the policymakers and regulatory institutions in being more cautious when making macroeconomic decisions as not only it affects the financial institutions but also businesses reliant on bank borrowings. It also encourages to formulate active macro-prudential policies with greater supervisory standards to achieve financial stability. Further, it is of great significance to academicians and practitioners as research solely based on the Japanese market is rather limited and our contribution helps to fill that gap in the previous literatures.
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