Testing for the Impact of Financing Constraints of Corporate Investment PDF Download

Author: Benedicte Millet-Reyes
Publisher:
ISBN:
Category : Capital investments
Languages : en
Pages : 182

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Author: Heitor Almeida
Publisher:
ISBN:
Category :
Languages : en
Pages : 45

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When firms are able to pledge their assets as collateral, investment and borrowing become endogenous: pledgeable assets support more borrowings that in turn allow for further investment in pledgeable assets. We show that this credit multiplier has an important impact on investment when firms face credit constraints: investment-cash flow sensitivities are increasing in the degree of tangibility of constrained firms' assets. If firms are unconstrained, however, investment-cash flow sensitivities are unaffected by asset tangibility. Crucially, asset tangibility itself may determine whether a firm faces credit constraints - firms with more tangible assets may have greater access to external funds. This implies that the relationship between capital spending and cash flows is non-monotonic in the firm's asset tangibility. Our theory allows us to use a differences-in-differences approach to identify the effect of financing frictions on corporate investment: we compare the differential (marginal) effect of asset tangibility on the sensitivity of investment to cash flow across different regimes of financial constraints. We implement this testing strategy on a large sample of manufacturing firms drawn from COMPUSTAT between 1985 and 2000. Our tests allow for the endogeneity of the firm's credit status, with asset tangibility influencing whether a firm is classified as credit constrained or unconstrained in a switching regression framework. The data strongly support our hypothesis about the role of asset tangibility on corporate investment under financial constraints.

Author: Meghana Ayyagari
Publisher: World Bank Publications
ISBN:
Category : Business enterprises
Languages : en
Pages : 59

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What role does the business environment play in promoting and restraining firm growth? Recent literature points to a number of factors as obstacles to growth. Inefficient functioning of financial markets, inadequate security and enforcement of property rights, poor provision of infrastructure, inefficient regulation and taxation, and broader governance features such as corruption and macroeconomic stability are discussed without any comparative evidence on their ordering. In this paper, the authors use firm level survey data to present evidence on the relative importance of different features of the business environment. They find that although firms report many obstacles to growth, not all the obstacles are equally constraining. Some affect firm growth only indirectly through their influence on other obstacles, or not at all. Using Directed Acyclic Graph methodology as well as regressions, the authors find that only obstacles related to finance, crime, and political instability directly affect the growth rate of firms. Robustness tests further show that the finance result is the most robust of the three. These results have important policy implications for the priority of reform efforts. They show that maintaining political stability, keeping crime under control, and undertaking financial sector reforms to relax financing constraints are likely to be the most effective routes to promote firm growth.

Author: Steven Fazzari
Publisher:
ISBN:
Category :
Languages : es
Pages : 45

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Author: Ann E. Harrison
Publisher: World Bank Publications
ISBN:
Category : Capital movements
Languages : en
Pages : 54

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Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease host-country firms' financing constraints. However, if incoming foreign investors borrow heavily from domestic basnks, direct foreign investment (DFI) may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combininb a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, we find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, we show that one type of capital inflow--DFI--is associated with a reduction in financing constraints. Second, we test whether restrictions on international transactions affect firms' financing constraints. Our results suggest that only one type of restriction--those on capital account transactions--negatively affect firms' financing constraints. We also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of DFI. This implies that DFI eases financing constraints for non-multinational firms. Finally, we show that DFI only eases financing constraints in the non-G7 countries.

Author: Vojislav Maksimovi?, Asl? Demirgüç-Kunt
Publisher: World Bank Publications
ISBN:
Category :
Languages : en
Pages : 54

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October 1996 The findings suggest that across very different financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment. An active, though not necessarily large, stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. Government subsidies to industry do not increase the proportion of firms growing faster than predicted. Demirgüç-Kunt and Maksimovic focus on two issues. First, they examine whether firms in different countries finance long-term and short-term investment similarly. Second, they investigate whether differences in financial systems and legal institutions across countries are reflected in the ability of firms to grow faster than they might have by relying on their internal resources or short-term borrowing. Across their sample, they find: * Positive correlations between investment in plant and equipment and retained earnings. * Negative correlations between investment in plant and equipment and external financing. * Negative correlations between investment in short-term assets and retained earnings. * Positive correlations between investment in short-term assets and external financing. These findings suggest that across very different financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment. For each firm in their sample, they estimate a predicted rate at which it can grow if it does not rely on long-term external financing. They show that the proportion of firms that grow faster than the predicted rate in each country is associated with specific features of the legal system, financial markets, and institutions. An active, though not necessarily large, stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. They present evidence that the law-and-order index measures the ability of creditors and debtors to enter into long-term contracts. Government subsidies to industry do not increase the proportion of firms growing faster than predicted. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the impact of financial constraints on firm growth.

Author: Joao F. Gomes
Publisher:
ISBN:
Category : Capital assets pricing model
Languages : en
Pages : 52

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We incorporate costly external finance in an investment-based asset pricing model and investigate whether financing frictions are quantitatively important for pricing a cross-section of expected returns. We show that common assumptions about the nature of the financing frictions are captured by a simple financing cost' function, equal to the product of the financing premium and the amount of external finance. This approach provides a tractable framework for empirical analysis. Using GMM, we estimate a pricing kernel that incorporates the effects of financing constraints on investment behavior. The key ingredients in this pricing kernel depend not only on fundamentals', such as profits and investment, but also on the financing variables, such as default premium and the amount of external financing. Our findings, however, suggest that the role played by financing frictions is fairly negligible, unless the premium on external funds is procyclical, a property not evident in the data and not satisfied by most models of costly external finance.

Author: Andrea Caggese
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Author: John Edward Stuart Brown
Publisher:
ISBN:
Category :
Languages : en
Pages : 282

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Author: Huili Chang
Publisher: Open Dissertation Press
ISBN: 9781361011997
Category : Business & Economics
Languages : en
Pages : 154

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This dissertation, "Monetary Policy, R&D Investment, and Test of Corporate Capital Structure Theory" by Huili, Chang, {273c54}{273f2f}丽, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: This dissertation consists of three chapters on monetary policy, R&D investment, and test of corporate capital structure theory. In the first chapter, I examine the impact of large-scale asset purchases (LSAPs) on corporate financing and investment. I find that LSAPs increased corporate financing and shifted the corporate financing pattern towards greater equity financing. Specifically, LSAPs enabled noninvestment-grade firms to issue more public equity and allowed investment-grade firms to issue more bonds. I find that LSAPs also affected the stock market through the portfolio balance channel. With the reversal of flight to quality, noninvestment-grade firms enjoyed significantly higher stock returns than investment-grade firms. After raising capital, public equity issuers used these proceeds to avoid bankruptcy, whereas debt issuers used the funds to expand their businesses. Therefore, unlike traditional monetary policy tools that affect bank lending, LSAPs stimulate the real economy by spurring the stock and bond markets and thereby providing firms with alternative sources of financing. In the second chapter, I attempt to differentiate demand-side reasons from supply-side reasons for firms with higher R&D investment to have a lower leverage. I use two identification events to test their different predictions, the introduction of state-level R&D tax credits and the grant of patents. Because state R&D tax credits increase R&D investment by firms headquartered in the state, I use their introduction to examine whether supply-side frictions affect corporate financing choices to finance R&D investment. I find that constrained firms issue more equity and have a lower leverage after their introduction, whereas unconstrained firms do not, which suggests that supply-side frictions force firms to issue equity to fund innovation. Because patents can partially relieve credit constraints, I use the grant of patents to analyze whether firms change their leverage after credit constraints are lessened. I find that firms increase their leverage after the grant of patents, which again indicates that supply-side frictions are dominant in shaping corporate leverage. Therefore, the negative relationship between R&D investment and corporate leverage is primarily due to supply-side frictions. In the third chapter, I point out that prior tests of the pecking order theory fail to consider whether firms have access to the debt market or not, and argue that small and high-growth firms' tendency to issue equity reflects no access to the debt market rather than rejects the pecking order. I adopt financial constraints as proxy for firms' access to the debt market, and empirically demonstrate that once financial constraints are controlled for, the pecking order provides a better description of firms' financing behaviors. To address the endogeneity problem, I use an exogenous event, firms' addition into the S&P 500 index. Consistent with my prediction, firms are more likely to issue debt after the addition. Finally, I show that financial constraints are different from the alternative explanation of debt capacity constraints. Subjects: Corporations - Finance