The relative contribution of financial and non-financial determinants to firm growth under high and low levels of information asymmetry

  • Mina Kamal Soliman Bishara

Student thesis: Doctoral ThesisDoctor of Philosophy


Various financial decisions contribute to the success of firms including investment decisions, dividend policy and financing decisions (capital structure). Nevertheless, other variables such as the industry in which the firm operates, size of the firm and ownership structure can also play an important role in increasing overall corporate performance. Extant research utilises a number of proxies for estimating corporate success, including profitability, size, employment, to name a few. This thesis focuses on one of the most important drivers of corporate success - firm growth. Arguably, growth is an ultimate goal for all companies as it benefits all stakeholders. In this study, firm growth is proxied using the growth-in-sales indicator. The financial and non-financial variables mentioned above can, in various circumstances, contribute or hinder firm growth. The three main corporate decisions (investment, dividends and financing), as reflected by the aforementioned financial measures, can contribute or hinder firm’s growth as there is almost always a trade-off amongst them, owing to their complex inter-relationships. Similarly, a non-financial determinant such as ownership structure can contribute to firm growth. A major factor that affects these relationships is the presence of information asymmetry. The latter is considered as a mediator as it could explain the relationship between financial, non-financial decisions and firm growth. Information asymmetry is measured in this thesis using three proxies to distinguish between high- and low-levels of information asymmetry, namely Sensitivity of stock returns to expected Return on Equity (Beta ROE), Probability of default of Return on Equity (PD ROE), and the Q Ratio. This thesis contributes to the literature of corporate finance by examining the relative contribution of financial and non-financial variables to firm’s growth, investigate the impact of the level of information asymmetry and examine the suitability of further proxies for measuring information asymmetry. The sample used in this study is all non-financial active companies listed in the S&P500 for the period from 1989-2014. The empirical investigation in this study involves tests for collinearity, linearity, normality, endogeneity, and fixed effects. To accommodate possible endogeneity issues, the regression analysis employed utilises a Generalised Method of Moments (GMM) framework alongside a standard linear regression, discriminate analysis, and Z-score modeling. The results of the empirical analysis indicate a variation in the impact of financial and non-financial variables on firm growth at high and low levels of information asymmetry especially regarding investment and financing decisions. A similar picture emerges for the cases of firm size and industry variables. Furthermore, the impact of changes in ownership structure appears to vary according to the level of information asymmetry and the proxy used to measure it. In addition, corporate dividend policy (information that is monitored closely by the market) has a similar effect on firm growth across all asymmetric levels. These findings prove that information asymmetry plays a vital role in the relationship between corporatefinancial decisions and growth of the firm. Finally, the results contribute to the relevant methodological discussion in the vast literature on the estimation of information asymmetry by demonstrating that the classical and standard proxies for information asymmetry are not consistent in terms of the ability to differentiate between favorable or adverse selection (which corresponds to low and high level of information asymmetry). Therefore, futureresearch is warranted in the identification of alternative proxies that can capture such effects across different market conditions and alternative firm characteristics.
Date of Award2017
Original languageEnglish
Awarding Institution
  • Coventry University

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