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

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK)

Date Written: August 24, 2012

Abstract

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

Wu, Xueping and Au Yeung, Chau Kin, Do Market Imperfections Give Rise to Financial Constraints? A Growth Type Explanation for the Sensitivity of Investment to Cash Flow (August 24, 2012). Available at SSRN: https://ssrn.com/abstract=2135429 or http://dx.doi.org/10.2139/ssrn.2135429

Xueping Wu (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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