Concave effect of financial flexibility on semiconductor industry performance: quantile regression approach
Abstract
To survive increasingly uncertain and competitive markets, technology and capitalintensive semiconductor companies need to be more agile, responsive and flexible than ever before. This study investigates the impact financial flexibility on firm performance within Taiwan’s semiconductor industry and whether the impact on FP differs depending on the semiconductor industry characteristics. Using quantile regression analysis, data from semiconductor companies listed on the Taiwan Stock Exchange during the COVID-19 shock was investigated. The results evidence an inverted U-shaped relationship between FF and FP in the lower and median return on equity quantiles of the semiconductor industry. For the asset heavy business model companies, FF has a concave impact on FP for IC-design and IC-manufacturing companies but not the semiconductor companies. For the asset light business model companies, FF has a concave impact on FP in the lower and median quantiles for semiconductor companies, in the upper quantiles for IC-design companies and in all except the 90th quantile for IC-manufacturing companies. The results of this research significantly contribute to extant literature as with such specific knowledge regarding the impact of FF on FP, managers are able to make decisions based on a firm’s individual FF-FP relationship and identify the most lucrative business trajectory.
First published online 19 May 2022
Keyword : financial flexibility, firm performance, return on equity, semiconductor industry, quantile regression, COVID-19
How to Cite
Chang, B.-G., & Wu, K.-S. (2022). Concave effect of financial flexibility on semiconductor industry performance: quantile regression approach. Technological and Economic Development of Economy, 28(4), 948–978. https://doi.org/10.3846/tede.2022.16622
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Fama, E. F., & French, K. R. (2005). Financing decisions: who issues stock? Journal of Financial Economics, 76(3), 549–582. https://doi.org/10.1016/j.jfineco.2004.10.003
Gamba, A., & Triantis, A. (2008). The value of financial flexibility. Journal of Finance, 63(5), 2263–2296. https://doi.org/10.1111/j.1540-6261.2008.01397.x
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2–3), 187–243. https://doi.org/10.1016/S0304-405X(01)00044-7
Gu, Y., & Yuan, F. (2020). Internal control, financial flexibility and corporate performance – Based on empirical analysis of listed companies in information technology industry. Journal of Physics: Conference Series, 1607, 012118. https://doi.org/10.1088/1742-6596/1607/1/012118
Hair, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2017). A primer on partial Least squares structural equation modeling (PLS-SEM) (2nd ed.). Sage Publications Inc.
Hizarci-Payne, A. K., Ipek, I., & Gümüs, G. K. (2021). How environmental innovation influences firm performance: A meta-analytic review. Business Strategy and the Environment, 30(2), 1174–1190. https://doi.org/10.1002/bse.2678
Hooshyar, A. M., Mohammadi, M. F., & Valizadeh, A. S. (2017). Factors affecting financial flexibility of firms listed in Tehran stock exchange. Journal of Economics and Finance, 8(1), 109–114. https://doi.org/10.9790/5933-080103109114
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329. https://doi.org/10.2139/ssrn.99580
Kedzior, M., Grabinska, B., Grabinski, K., & Kedzior, D. (2020). Capital structure choices in technology firms: Empirical results from Polish listed companies. Journal of Risk and Financial Management, 13(9), 221. https://doi.org/10.3390/jrfm13090221
Kempf, T., Bobek, V., & Horvat, T. (2021). The impacts of the American Chinese trade war and COVID-19 pandemic on Taiwan’s sales in semiconductor industry. International Journal of Economics and Finance, 13(4), 62–72. https://doi.org//10.5539/ijef.v13n4p62
Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. https://doi.org/10.2307/1913643
Kuo, Y. C., & Klingler-Vidra, R. (2021). Post-COVID-19 Taiwan in the global semiconductor industry: The context of the new U.S. administration. Taiwan Insight. Retrieved July 14, 2020, from https://taiwaninsight.org/2021/02/16/post-covid-19-taiwan-in-the-global-semiconductor-industry-the-context-of-the-new-u-s-administration/
La Rocca, M., & Cambrea, D. R. (2019). The effect of cash holdings on firm performance in large Italian companies. Journal of International Financial Management & Accounting, 30(1), 30–59. https://doi.org/10.1111/jifm.12090
Marchica, M. T., & Mura, R. (2010). Financial flexibility, investment ability, and firm value: Evidence from firms with spare debt capacity. Financial Management, 39(4), 1339–1365. https://doi.org/10.1111/j.1755-053X.2010.01115.x
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital. American Economic Review, 53(3), 433–443.
Nohria, N., & Gulati, R. (1997). What is the optimum amount of organizational slack? A study of the relationship between slack and innovation in multinational firms. European Management Journal, 15(6), 603–611. https://doi.org/10.1016/S0263-2373(97)00044-3
Park, J. H., Chung, H., Kim, K. H., Kim, J. J., & Lee, C. (2021). The impact of technological capability on financial performance in the semiconductor industry. Sustainability, 13(2), 489. https://doi.org/10.3390/su13020489
Ramelli, S., & Wagner, A. F. (2020). Feverish stock price reactions to COVID-19. The Review of Corporate Finance Studies, 9(3), 622–655. https://doi.org/10.1093/rcfs/cfaa012
Rumbaugh, C., Hrbek, J., Hickey, M., Markowitz, N., Howell, T., & Awwad, M. (2021). Review of the effect of COVID-19 on the American semiconductor industry supply chain. In Proceedings of the International Conference on Industrial & Mechanical Engineering and Operations Management Dhaka, 2020 December 26–27, Bangladesh. http://www.ieomsociety.org/imeom/145.pdf
Seo, K., Woo, L, Mun, S. G., & Soh, J. (2021). The asset-light business model and firm performance in complex and dynamic environments: The dynamic capabilities view. Tourism Management, 85, 104311. https://doi.org/10.1016/j.tourman.2021.104311
Sohn, J., Tang, C. H., & Jang, S. (2013). Does the asset-light and fee-oriented strategy create value? International Journal of Hospitality Management, 32, 270–277. https://doi.org/10.1016/j.ijhm.2012.07.004
Song, H. J., Yeon, J., & Lee, S. (2021). Impact of the COVID-19 pandemic: Evidence from the U.S. restaurant industry. International Journal of Hospitality Management, 92, 102702. https://doi.org/10.1016/j.ijhm.2020.102702
Teng, X., Chang. B. G., & Wu, K. S. (2021). The role of financial flexibility on enterprise sustainable development during the COVID-19 crisis – A consideration of tangible assets. Sustainability, 13(3), 1245–1261. https://doi.org/10.3390/su13031245
Thorbecke, W. (2021). The semiconductor industry in the age of trade wars, Covid-19, and strategic rivalries (RIETI Discussion Paper Series 21-E-064). Research Institute of Economy, Trade and Industry. https://www.rieti.go.jp/jp/publications/dp/21e064.pdf
Yi, J. (2020). Financial flexibility, dynamic capabilities, and the performance of manufacturing enterprises. Journal of Research in Emerging Markets, 2(2), 19–32. https://doi.org/10.30585/jrems.v2i2.465
Yun, J., Ahmad, H., Jebran, K., & Muhammad, S. (2021). Cash holdings and firm performance relationship: Do firm-specific factors matter? Economic Research-Ekonomska Istraživanja, 34(1), 1238–1305. https://doi.org/10.1080/1331677X.2020.1823241
Aldieri, L. (2013). Knowledge technological proximity: Evidence from US and European patents. Economics of Innovation and New Technology, 22(8), 807–819. https://doi.org/10.1080/10438599.2013.788838
Al-Slehat, Z. A. F. (2019). The impact of the financial flexibility on the performance: An empirical study on a sample of Jordanian services sector firms in period (2010–2017). International Journal of Business and Management, 14(6), 1–11. https://doi.org/10.5539/ijbm.v14n6p1
Ali, A., & Siddiqui, D. A. (2020). Exploring the nexus between financial flexibility, managerial efficiency, ownership, and performance: An interactive model for growth, mature, and stagnant companies in Pakistan. SSRN. https://doi.org/10.2139/ssrn.3681306
Ardito, L., Messeni Petruzzelli, A., & Albino, V. (2016). Investigating the antecedents of general purpose technologies: A patent perspective in the green energy field. Journal of Engineering and Technology Management, 39, 81–100. https://doi.org/10.1016/j.jengtecman.2016.02.002
Arslan-Ayaydin, Ö., Florackis, C., & Ozkan, A. (2014). Financial flexibility, corporate investment and performance: Evidence from financial crises. Review of Quantitative Finance and Accounting, 42, 211–250. https://doi.org/10.2139/ssrn.1234682
Bilyay-Erdogan, S. (2020). Does financial flexibility enhance firm value? A comparative study between developed and emerging countries. Business: Theory and Practice, 21(2), 723–736. https://doi.org/10.3846/btp.2020.12680
Boisjoly, R. P., Conine Jr, T. E., & McDonald, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1–8. https://doi.org/10.1016/j.jbusres.2019.09.025
Chang, B. C., & Wu, K. S. (2021). The nonlinear relationship between financial flexibility and enterprise risk-taking during the COVID-19 pandemic in Taiwan’s semiconductor industry. Oeconomia Copernicana, 12(2), 307–333. https://doi.org/10.24136/oc.2020.011
Chang, B. G., & Wu, K. S. (2022). Convex-concave effect of financial flexibility on hospitality performance: Quantile regression approach. International Journal of Contemporary Hospitality Management, 34(2), 687–712. https://doi.org/10.1108/IJCHM-07-2021-0867
Chang, H. Y., & Ma, C. A. (2019). Financial flexibility, managerial efficiency and firm life cycle on firm performance: An empirical analysis of Chinese listed firms. Journal of Advances in Management Research, 16(2), 168–180. https://doi.org/10.1108/JAMR-06-2017-0072
Cheng, M. C., Wang, H. W., Chen, Y. H., & Chou, T. H. (2021). The impact of the U.S. and China trade war on Taiwan’s IC industry. Journal of US-China Public Administration, 18(2), 47–67. https://doi.org/10.17265/1548-6591/2021.02.001
Chiang, T. C., Li, J., & Tan, L. (2010). Empirical investigation of herding behavior in Chinese stock markets: Evidence from quantile regression analysis. Global Finance Journal, 21(1), 111–124. https://doi.org/10.1016/j.gfj.2010.03.005
Chun, M. A., & Yanbo, J. (2016). What drives the relationship between financial flexibility and firm performance: Investment scale or investment efficiency? Evidence from China. Emerging Markets Finance and Trade, 52(9), 2043–2055. https://doi.org/10.1080/1540496X.2015.1098036
DeAngelo, H., & DeAngelo, L. (2007). Capital structure, payout policy, and financial flexibility (Working Paper No. FBE 02-06). Marshall School of Business. https://doi.org/10.2139/ssrn.916093
Denis, D. J., & Mckeon, S. B. (2012). Debt financing and financial flexibility evidence from proactive leverage increases. The Review of Financial Studies, 25(6), 1897–1929. https://doi.org/10.1093/rfs/hhs005
Dittmar, A., Mahrt-Smith, J., & Servaes, H. (2003). International corporate governance and corporate cash holdings. The Journal of Financial and Quantitative Analysis, 38(1), 111–133. https://doi.org/10.2307/4126766
Fahlenbrach, R., Rageth, K., & Stulz, R. M. (2020). How valuable is financial flexibility when revenue stops? Evidence from the COVID-19 Crisis. SSRN. https://doi.org/10.2139/ssrn.3586540
Fama, E. F., & French, K. R. (2005). Financing decisions: who issues stock? Journal of Financial Economics, 76(3), 549–582. https://doi.org/10.1016/j.jfineco.2004.10.003
Gamba, A., & Triantis, A. (2008). The value of financial flexibility. Journal of Finance, 63(5), 2263–2296. https://doi.org/10.1111/j.1540-6261.2008.01397.x
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2–3), 187–243. https://doi.org/10.1016/S0304-405X(01)00044-7
Gu, Y., & Yuan, F. (2020). Internal control, financial flexibility and corporate performance – Based on empirical analysis of listed companies in information technology industry. Journal of Physics: Conference Series, 1607, 012118. https://doi.org/10.1088/1742-6596/1607/1/012118
Hair, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2017). A primer on partial Least squares structural equation modeling (PLS-SEM) (2nd ed.). Sage Publications Inc.
Hizarci-Payne, A. K., Ipek, I., & Gümüs, G. K. (2021). How environmental innovation influences firm performance: A meta-analytic review. Business Strategy and the Environment, 30(2), 1174–1190. https://doi.org/10.1002/bse.2678
Hooshyar, A. M., Mohammadi, M. F., & Valizadeh, A. S. (2017). Factors affecting financial flexibility of firms listed in Tehran stock exchange. Journal of Economics and Finance, 8(1), 109–114. https://doi.org/10.9790/5933-080103109114
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329. https://doi.org/10.2139/ssrn.99580
Kedzior, M., Grabinska, B., Grabinski, K., & Kedzior, D. (2020). Capital structure choices in technology firms: Empirical results from Polish listed companies. Journal of Risk and Financial Management, 13(9), 221. https://doi.org/10.3390/jrfm13090221
Kempf, T., Bobek, V., & Horvat, T. (2021). The impacts of the American Chinese trade war and COVID-19 pandemic on Taiwan’s sales in semiconductor industry. International Journal of Economics and Finance, 13(4), 62–72. https://doi.org//10.5539/ijef.v13n4p62
Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. https://doi.org/10.2307/1913643
Kuo, Y. C., & Klingler-Vidra, R. (2021). Post-COVID-19 Taiwan in the global semiconductor industry: The context of the new U.S. administration. Taiwan Insight. Retrieved July 14, 2020, from https://taiwaninsight.org/2021/02/16/post-covid-19-taiwan-in-the-global-semiconductor-industry-the-context-of-the-new-u-s-administration/
La Rocca, M., & Cambrea, D. R. (2019). The effect of cash holdings on firm performance in large Italian companies. Journal of International Financial Management & Accounting, 30(1), 30–59. https://doi.org/10.1111/jifm.12090
Marchica, M. T., & Mura, R. (2010). Financial flexibility, investment ability, and firm value: Evidence from firms with spare debt capacity. Financial Management, 39(4), 1339–1365. https://doi.org/10.1111/j.1755-053X.2010.01115.x
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital. American Economic Review, 53(3), 433–443.
Nohria, N., & Gulati, R. (1997). What is the optimum amount of organizational slack? A study of the relationship between slack and innovation in multinational firms. European Management Journal, 15(6), 603–611. https://doi.org/10.1016/S0263-2373(97)00044-3
Park, J. H., Chung, H., Kim, K. H., Kim, J. J., & Lee, C. (2021). The impact of technological capability on financial performance in the semiconductor industry. Sustainability, 13(2), 489. https://doi.org/10.3390/su13020489
Ramelli, S., & Wagner, A. F. (2020). Feverish stock price reactions to COVID-19. The Review of Corporate Finance Studies, 9(3), 622–655. https://doi.org/10.1093/rcfs/cfaa012
Rumbaugh, C., Hrbek, J., Hickey, M., Markowitz, N., Howell, T., & Awwad, M. (2021). Review of the effect of COVID-19 on the American semiconductor industry supply chain. In Proceedings of the International Conference on Industrial & Mechanical Engineering and Operations Management Dhaka, 2020 December 26–27, Bangladesh. http://www.ieomsociety.org/imeom/145.pdf
Seo, K., Woo, L, Mun, S. G., & Soh, J. (2021). The asset-light business model and firm performance in complex and dynamic environments: The dynamic capabilities view. Tourism Management, 85, 104311. https://doi.org/10.1016/j.tourman.2021.104311
Sohn, J., Tang, C. H., & Jang, S. (2013). Does the asset-light and fee-oriented strategy create value? International Journal of Hospitality Management, 32, 270–277. https://doi.org/10.1016/j.ijhm.2012.07.004
Song, H. J., Yeon, J., & Lee, S. (2021). Impact of the COVID-19 pandemic: Evidence from the U.S. restaurant industry. International Journal of Hospitality Management, 92, 102702. https://doi.org/10.1016/j.ijhm.2020.102702
Teng, X., Chang. B. G., & Wu, K. S. (2021). The role of financial flexibility on enterprise sustainable development during the COVID-19 crisis – A consideration of tangible assets. Sustainability, 13(3), 1245–1261. https://doi.org/10.3390/su13031245
Thorbecke, W. (2021). The semiconductor industry in the age of trade wars, Covid-19, and strategic rivalries (RIETI Discussion Paper Series 21-E-064). Research Institute of Economy, Trade and Industry. https://www.rieti.go.jp/jp/publications/dp/21e064.pdf
Yi, J. (2020). Financial flexibility, dynamic capabilities, and the performance of manufacturing enterprises. Journal of Research in Emerging Markets, 2(2), 19–32. https://doi.org/10.30585/jrems.v2i2.465
Yun, J., Ahmad, H., Jebran, K., & Muhammad, S. (2021). Cash holdings and firm performance relationship: Do firm-specific factors matter? Economic Research-Ekonomska Istraživanja, 34(1), 1238–1305. https://doi.org/10.1080/1331677X.2020.1823241