Corporate entrepreneurship and debt financing: evidence from the GCC countries

Abstract

Purpose

The Gulf Cooperation Council (GCC) member countries have recently given tremendous emphasis to corporate entrepreneurship. The purpose of this paper is to investigate whether the lack of entrepreneurship in publicly listed GCC firms affects their ability to acquire debt financing.

Design/methodology/approach

Using stochastic frontier approach, the paper estimates an optimal revenue function given labor costs, operating expenses, and existing physical infrastructure of an organization. The paper estimates the difference between the optimal and actual level of firm revenues from a revenue frontier function, which can be partially resulted from managerial inefficiency due to the lack of corporate entrepreneurship. The paper uses fixed-effect panel regression and simultaneous equations system to determine the effect of such inefficiency on firms’ debt financing.

Findings

The main finding is that as entrepreneurial activities increase, firms’ ability to borrow from banks also increases. Results also indicate that increased borrowing improves internal governance practices and indirectly compel the management to become more efficient.

Research limitations/implications

Results exhibit how improving entrepreneurship affects firms’ access to external financing when the financial markets are underdeveloped and are plagued with information asymmetry and agency problems.

Practical implications

The paper provides insights for policy makers in the GCC and other emerging countries where entrepreneurial activities are becoming a priority.

Originality/value

The paper develops a new proxy measure of entrepreneurship in public firms and advances our knowledge about the importance of entrepreneurship in finance.

Citation

H. Chowdhury, R. and Maung, M. (2013), "Corporate entrepreneurship and debt financing: evidence from the GCC countries", International Journal of Managerial Finance, Vol. 9 No. 4, pp. 294-313. https://doi.org/10.1108/IJMF-11-2012-0124