Do Market Imperfections Give Rise to Financial Constraints? A Growth Type Explanation for the Sensitivity of Investment to Cash Flow
49 Pages Posted: 25 Aug 2012
Date Written: August 24, 2012
We identify a firm’s growth type by its valuation volatility which proxies for the extent to which asymmetric information arises from growth opportunities rather than from assets-in-place. We show that firm investment style (measured by R&D/[Capex R&D]) is persistent and positively aligned with growth type. The sensitivity of investment to cash flow has a monotonic negative relationship with growth type. Additionally, the sensitivity of equity-and-debt-financing-differential to market conditions increases with investment style, reflecting a growth-type-aligned pecking order in financing. These findings demonstrate that firms invest and seek financing in a manner compatible with their growth type. This suggests that informational imperfections do not necessarily impose financing constraints on firms listed on well-functioning capital markets.
Keywords: Investment, Informational Imperfections, Growth Type, Financing Constraints
JEL Classification: G30, G31, G32, D92
Suggested Citation: Suggested Citation