The Effects of Financial Constraints on Corporate Policies in Australia

39 Pages Posted: 12 Oct 2005

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Tek Jun Tan

University of Melbourne - Department of Finance

George Wong

The Hong Kong Polytechnic University

Hong Feng Zhang

Deakin University - Deakin Business School

Date Written: April 2006

Abstract

We jointly study the impact of financial constraints on Australian companies' investment decisions and demand for liquidity. By examining a large sample of Australian firms over the period 1990 to 2003, we find that financial constraints not only reduce the sensitivity of investment to the availability of internal funds, but also increase the responsiveness of cash holdings to internally generated cash flows. Further analysis shows that the impact of financial constraints varies across different cash flow states, i.e., financial constraints have a small effect on corporate investment and cash policies when cash flows are positive. In contrast, the severity of constraints is high in negative cash flow years in which the cost disadvantage of external finance coincides with deteriorating operating performance.

Keywords: Financial Constraints, Cash Policy, Investment-Cash Flow Sensitivity, Cash-Cash Flow Sensitivity, Negative Cash Flow, Australian Firms

JEL Classification: G31, G32

Suggested Citation

Chang, Xin and Tan, Tek Jun and Wong, George and Zhang, Hong Feng, The Effects of Financial Constraints on Corporate Policies in Australia (April 2006). Available at SSRN: https://ssrn.com/abstract=816385 or http://dx.doi.org/10.2139/ssrn.816385

Xin Chang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Tek Jun Tan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

George Wong

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kowloon, 0
Hong Kong
852 3400 3459 (Phone)
852 2330 9845 (Fax)

Hong Feng Zhang

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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