Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales

30 Pages Posted: 18 Feb 2003

See all articles by Gayané Hovakimian

Gayané Hovakimian

Fordham University, Gabelli School of Business

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2002

Abstract

This paper examines the importance of financial constraints for firm investment expenditures by looking at the relationship between investment expenditures and proceeds from voluntary asset sales in financially healthy US manufacturing companies. Specifically, we examine whether asset sales have a greater influence on investment expenditures for firms that are likely to be financially constrained. Asset sales may provide a cleaner indicator of liquidity than cash flow since it appears not to be positively correlated with future investment opportunities. The cross-sectional differences in firm investment expenditures are examined using an endogenous switching regression model with unknown sample separation, which does not require an a priori classification of firms or knowledge of their financial constraints. We find that after controlling for investment opportunities and cash generated from operations, cash obtained from asset sales is a significant determinant of corporate investment. Moreover, the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be associated with characteristics associated with financial constraints.

Keywords: investment, asset sales

JEL Classification: G31, G32, G34

Suggested Citation

Hovakimian, Gayané and Titman, Sheridan, Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales (December 4, 2002). Available at SSRN: https://ssrn.com/abstract=361260 or http://dx.doi.org/10.2139/ssrn.361260

Gayané Hovakimian (Contact Author)

Fordham University, Gabelli School of Business ( email )

Joseph A. Martino Hall
45 Columbus Ave
New York, NY 10023
United States
212-636-7021 (Phone)

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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