Corporate Investments and Financing Constraints. Analyzing Firm-Varying Investment-Cash Flow Sensitivities

Bert D'Espallier (), Sigrid Vandemaele and Ludo Peeters

Review of Business and Economic Literature, 2009, vol. LIV, issue 4, 461-488

Abstract: Recent studies in corporate finance estimate firm-varying investment-cash flow sensitivities (ICFS) when empirically studying financing constraints. We go along with this approach but suggest two methodological improvements. First, we estimate firm-varying ICFS by modeling heterogeneous slopes in the investment equation thereby taking into account the dynamics of the underlying investment model. Secondly, we study the drivers of ICFS in an ex-post regression-analysis thereby accounting for non-linear effects and ‘ceteris-paribus’-conditions. The results show that the firm’s ICFS is negatively related to size, dividend payout, profitability, and positively related to leverage suggesting a tight link between ICFS and the firm’s constraints-status. Additionally, ICFS is negatively related to the level and volatility of cash flow, 5suggesting that a significant ICFS occurs mainly in low cash flow-states and can be lowered by the practice of cash-buffering. Finally, we find evidence of a non-linear tangibility-effect in line with the non-monotonic credit multiplier.

Keywords: financing constraints; investment-cash flow sensitivities; firm-specific sensitivities; slope heterogeneity (search for similar items in EconPapers)
JEL-codes: G30 G31 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:ete:revbec:20090403

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