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Nonetheless, it is important to note that households in Malaysia hold significant net financial assets (about 95 percent of GDP as of 2017), part of which may reflect precautionary motives.
Gross or and net saving rates are defined as shares of total asset, as opposed to profit, because profit can be either positive or negative.
The sum of cash flows over a period of 10 years could be a good approximation of cumulative cash stock, unless the firm had a large initial cash stock in the beginning of the period (e.g., mature firms).
Similar to Rajan and Zingales (1998), we treat large and small firms equally, which allows us to prevent large, mature firms from swamping the information of small firms (e.g., Apple’s large free cash flow should mask the possible constraint faced by smaller IT firms).
Production function is used to represent the investment cycle of an industry driven by the technological characteristics associated with the industry, such as size of initial investment, implementation period, cash harvest period, and follow-up investment.
The 45-degree line (red solid line) represents industries with identical EFD in Malaysia as in the United States. The size of each bubble is proportional to the total asset size of the corresponding industry. The bubbles below the 45- degree line designate industries that depict lower external financial dependence in Malaysia compared to the US. In addition, the chart does not show industries with large X-values and small Y-values (i.e., industries with large EFD in the United States). These outliers include transportation by air, chemicals and allied products, etc.
The interquartile range of Malaysian industries’ EFDs is 1.1 (75th percentile: 0.7; 25th percentile: -0.4); whereas it is 2.1 (75th percentile: 1.4; 25th percentile: -0.7) for American industries.
We define an industry is of high EFD if its desired EFD is above the median EFD across all industries. The headers H and L in the bottom panels below correspond to industries with high and low EFD, respectively.
Some caveats are worth mentioning. First, the identification of the desired EFDs for Malaysian firms hinges on the assumption that firms in the same industry share similar technologies and investment cycles across countries. This assumption would be challenged, for example, by the distinct roles that firms in different countries play in the global value chain. Second, this is only a partial equilibrium result, in the sense that it does not consider the counterfactual effect of increased capital expenditure on future cash flows (i.e., operational cash flows are taken as given).
Ownership data is obtained from Orbis and matched to the WorldScope database using industry category, incorporation year, and firm size.
Coefficients on the year dummies are not shown in the table to save space.
Eyraud, L., X. Debrun, A. Hodge, V. Lledo, and C. Pattillo 2018. “Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability.” IMF Staff Discussion Note 18/04, International Monetary Fund, Washington, DC.
Lledó, V., S. Acevedo, and M. Sasson. 2019. “Enhancing Ecuador’s Fiscal Framework: Lessons from Second-Generations Rules-Based Systems.” Forthcoming, IMF Working Paper.