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
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: Suggested Citation
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