Financial Constraints and Firm-Level Investment in Asia: Dynamic Panel Smooth Threshold Regression Approach

Abstract

This paper provides evidence on the impact of internal finance constraints, growth opportunities and debt overhang on the firm-level investment in 14 Asian countries over the period of 1990-2010. We used Panel Smooth Threshold Regression (PSTR) which relaxes the assumption of the a priori splitting of firms into constrained and unconstrained firms. We provide large-sample evidence that shows, for firms with low cash flow and low growth opportunities, investment is not sensitive to the availability of internal finance, and that these firms rely more on the long-term debt finance than external equity. Our results indicate that for firms with high cash flow and high growth opportunities, equity finance dominate the long-term debt finance. On the other hand, for high leveraged firms, debt overhang reduces investment through a ‘liquidity’ effect. We find that firms with concentrated ownership are not financially constrained, and that they use more equity finance than long-term debt to finance investment. Overall, our findings indicate the availability and access to sources of external finance is critical for firm investment in Asia.

Keywords: investment, debt overhang, growth opportunities, finance constraints, financial

JEL Classification: C12, F4, G15, G32