Financial Constraints, Mispricing and Corporate Investment

43 Pages Posted: 14 Mar 2008 Last revised: 18 Mar 2009

See all articles by George Wong

George Wong

The Hong Kong Polytechnic University

Robert W. Faff

University of Queensland

Wing Chun Kwok

Monash University - Department of Accounting and Finance

Xin (Simba) Chang

Nanyang Business School

Date Written: March 12, 2009

Abstract

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.

Keywords: Financial constraints, Mispricing, Corporate Investment, Investment-cash flow sensitivity, Financial Flexibility

JEL Classification: G31, G32

Suggested Citation

Wong, George and Faff, Robert W. and Chun Kwok, Wing and Chang, Xin, Financial Constraints, Mispricing and Corporate Investment (March 12, 2009). Available at SSRN: https://ssrn.com/abstract=1101361 or http://dx.doi.org/10.2139/ssrn.1101361

George Wong (Contact Author)

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kowloon, 0
Hong Kong
852 3400 3459 (Phone)
852 2330 9845 (Fax)

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Wing Chun Kwok

Monash University - Department of Accounting and Finance ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Xin Chang

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

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