Financial Constraints and Investment-Cash Flow Sensitivities PDF Download

Author: Heitor Almeida
Publisher:
ISBN:
Category :
Languages : en
Pages : 26

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Book Description
A key assumption in the existing theoretical work on firm financial constraints is that these constraints translate entirely into higher costs of funds. This approach poses two types of difficulties to the research on that topic. First, it inadvertently narrows our understanding about financial constraints since, in practice, firms often face credit rationing. Second, it is a matter of debate whether such an approach can deliver unambiguous implications for corporate investment. The current paper develops a theory explaining the relationship between corporate investment and cash flow when firms face credit quantity constraints. We show that when firms' investments and use of external finance are endogenously related, investment-cash flow sensitivities increase as credit constraints are relaxed. From an empirical perspective, our analysis suggests a consistent way of identifying the impact of financial constraints on corporate investment. Our predictions, however, are markedly different from those examined in most empirical studies in this area.

Author: Heitor Almeida
Publisher:
ISBN:
Category : Cash flow
Languages : en
Pages : 292

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Book Description

Author: Heitor Almeid
Publisher:
ISBN:
Category :
Languages : en
Pages : 28

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Book Description
This paper analyzes the investment behavior of firms under a quantity constraint on the amount of external funds which can be raised at a given cost (credit constraints). In this world, investment-cash flow sensitivities decrease in the degree of credit constraints, until a firm becomes effectively unconstrained. This generates a acirc;not;SU-shapedacirc;not;? curve for the relationship between sensitivities and credit constraints. Froman empirical perspective, the good news is that we suggest a theoretically consistent way to identify the impact of financial constraints on investment behavior, at least under the condition that financial constraints affect primarily the quantity of credit available to firms. The bad news is that our prediction is in a sense the opposite as the one explored in previous empirical literature.

Author: Steven N. Kaplan
Publisher:
ISBN:
Category : Cash flow
Languages : en
Pages : 24

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Book Description
Kaplan and Zingales [1997] provide both theoretical arguments and empirical evidence that investment-cash flow sensitivities are not good indicators of financing constraints. Fazzari, Hubbard and Petersen [1999] criticize those findings. In this note, we explain how the Fazzari et al. [1999] criticisms are either very supportive of the claims in Kaplan and Zingales [1997] or incorrect. We conclude with a discussion of unanswered questions.

Author: Mr.Vadim Khramov
Publisher: International Monetary Fund
ISBN: 1475502877
Category : Business & Economics
Languages : en
Pages : 28

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Book Description
This paper uses the financial crisis of 2008 as a natural experiment to demonstrate that when measuring investment-cash flow sensitivity, the value of a firm's assets that can be used as collateral should be taken into account. Using panel data on U.S. firms from 1990 to 2011, it was found that the share of physical capital in assets has a strong influence on investment-cash flow sensitivity, which decreased substantially after the crisis when banks changed their expectations about the value of assets on firms' balance sheets. This paper deepens our understanding of firms' investment behavior.

Author: Ryusuke Oishi
Publisher:
ISBN:
Category :
Languages : en
Pages : 538

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Book Description
A firm is defined as financially constrained when its access to external source of financing is limited, resulting in difficulties with maintenance of efficient investment levels due to possible cash shortages. Such firms' investment levels are generally believed to be sensitive to their cash flows. However, two characteristics of the information asymmetry ('agency problem' and 'adverse selection problem') between firms' insiders and outsiders, can introduce some discrepancies to this financial constraint problems. Moreover, the above informational asymmetry characteristics can also depend on financial market behaviour. This thesis analyses the aforementioned financial constraint feedback mechanism. Specifically, in Chapter 2 we perform a comparative analysis of the firms in five leading G20 countries, and how the dynamics of their investment behaviour respond to financial market type. Two markets are considered - Anglo-Saxon market (present in the US and the UK), and bank-based market (present in Japan, Germany, and Korea). In addition, the investigation looks at the firm-specific attribute, banking affiliation, which is present in Japan, Germany and Korea. Our comparative analysis reveals that, on average, firms in the bank-based market are less likely to suffer from financial constraint problems. Moreover, the banking affiliation characteristic is found to play a significant role in firm financial constraint problem mitigation. In Chapter 3 we separately investigate the relationships between the US firms' financial constraints and two informational asymmetry problems, namely, agency problems involving the manager's over-investment incentives and the adverse selection problem originating from stock return volatility. Our empirical analysis identifies that the manager's over-investment incentive negatively impacts the firms' financial constraint status, moreover, the firms exhibiting higher stock return volatilities are more likely to be financially constrained.

Author: Thomas Koch
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
Financial constraints are a main driver hindering firms' growth potential. The pecking order suggests that firms rely on internal funds when they are available to finance their investment expenditures. If a firm faces larger financial constraints, it is even more dependent on the availability of internally generated cash flow. On the empirical side, investment-cash flow sensitivities and cash-cash flow sensitivities are used to test for the presence of financial constraints. In this paper, we use a large data set and analyze different, sometimes conflicting findings in the literature. We find that (1), the regression results are very sensitive to the splitting scheme used to classify firms into financially constrained and unconstrained firms and results may be different according to the regression technique used, (2), the inclusion of distressed firm years (negative cash flow years) in the regressions changes results significantly and can at least partly explain previous opposite results concerning the usefulness of ICFS and CFSC, (3), cash flow matters, (4), ICFS and CFSC are declining over time and even vanish for some regression specifications in recent years and finally, (5), the relationship between cash flow and investment and to a lower extent the relationship between cash flow and changes in cash holdings are U-shaped.

Author: George Wong
Publisher:
ISBN:
Category :
Languages : en
Pages : 43

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Book Description
This study examines the separate impact and joint effect of financial constraints and financial market mispricing on the sensitivity of investment to internal cash flows. Using a large sample of US manufacturing firms over the period 1971-2004, we find that financially unconstrained firms are more flexible in adjusting their sources of financing for corporate investment in response to financial market mispricing. Specifically, financially unconstrained firms tend to have lower (higher) investment-cash flow sensitivities in situations of overvaluation (undervaluation). This provides an explanation of why unconstrained firms have higher valuations than constrained firms.

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

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Book Description
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: Kose John
Publisher: Emerald Group Publishing
ISBN: 0857249150
Category : Business & Economics
Languages : en
Pages : 210

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Book Description
Presents research on corporate governance from a number of countries across the world, including the United States, Spain, Malaysia, Israel and others. This title examines many important corporate governance mechanisms, such as board characteristics, ownership structure, legal protection of shareholders, and annual general meetings.