Corporate Investment and Financing Constraints: Analyzing Firm-Varying Investment-Cash Flow Sensitivities

Review of Business and Economics, Vol. 54. No. 4, pp. 461-488

33 Pages Posted: 6 Apr 2009 Last revised: 26 Apr 2010

See all articles by Bert D'Espallier

Bert D'Espallier

Catholic University of Louvain (UCL) - Lessius University College; Hogeschool-Universiteit Brussel (HUBrussel)

Sigrid Vandemaele

Limburgs Universitair Centrum (LUC)

Ludo Peeters

Hasselt University

Date Written: April 6, 2009

Abstract

Recent studies in corporate finance estimate firm-varying investment-cash flow sensitivities (ICFS) when empirically studying financing constraints. We go along with this approach but suggest two methodological improvements. First, we estimate firm-varying ICFS by modeling heterogeneous slopes in the investment equation thereby taking into account the dynamics of the underlying investment model. Secondly, we study the drivers of ICFS in an ex-post regression-analysis thereby accounting for non-linear effects and ‘ceteris-paribus’-conditions. The results show that the firm’s ICFS is negatively related to size, dividend payout, profitability, and positively related to leverage suggesting a tight link between ICFS and the firm’s constraints-status. Additionally, ICFS is negatively related to the level and volatility of cash flow, suggesting that a significant ICFS occurs mainly in low cash flow-states and can be lowered by the practice of cash-buffering. Finally, we find evidence of a non-linear tangibility-effect in line with the non-monotonic credit multiplier.

Keywords: financing constraints, investment-cash flow sensitivities, firm-specific sensitivities, slope heterogeneity

JEL Classification: G30, G31

Suggested Citation

D'Espallier, Bert and D'Espallier, Bert and Vandemaele, Sigrid and Peeters, Ludo, Corporate Investment and Financing Constraints: Analyzing Firm-Varying Investment-Cash Flow Sensitivities (April 6, 2009). Review of Business and Economics, Vol. 54. No. 4, pp. 461-488, Available at SSRN: https://ssrn.com/abstract=1373702

Bert D'Espallier

Catholic University of Louvain (UCL) - Lessius University College ( email )

Department of Business Studies
Korte Nieuwstraat 33
Antwerp, 2000
Belgium

Hogeschool-Universiteit Brussel (HUBrussel) ( email )

Stormstraat 2
Brussels, 1000
Belgium

Sigrid Vandemaele (Contact Author)

Limburgs Universitair Centrum (LUC) ( email )

B-3590 Diepenbeek
Belgium

Ludo Peeters

Hasselt University ( email )

Agoralaan - building D
Gebouw D
Diepenbeek, 3590
Belgium

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