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Nexus between Firm Level Investment and Financing Constraint Measures: A Critical Review

Humaira Husain (), Khairul Alom () and Kazi Md. Tarique ()
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Humaira Husain: Department of Economics, North South University, Dhaka, BANGLADESH
Khairul Alom: School of Business, Southeast University, Dhaka, BANGLADESH
Kazi Md. Tarique: School of Business, Southeast University, Dhaka, BANGLADESH

Review of Economics & Finance, 2018, vol. 12, 88-101

Abstract: This article critically examines recent literature for apparently contradictory findings of FHP and KZ strand theory of investment cash-flow responsiveness, as firm level investment is one of the major drivers of economic growth. The reason for opposite findings of FHP and KZ is: FHP addressed the supply side determinants of external finance, while KZ used the demand side determinants. Recent findings show that investment irreversibility might cause insignificant investment cash-flow sensitivity for constrained firms. Furthermore, recent studies demonstrate that cash-flow volatility does play an important role in determining degree of sensitivity of investment to change in internally generated corporate funds within constrained group of firms. For constrained firms asymmetric information problem is dominated by cash-flow volatility and investment irreversibility varies positively with cash-flow volatility. Financial constraint should be relaxed for constrained firms which have relatively lower degree of volatility in internally generated corporate funds. Increase in cash stock also induces constrained firms to invest more than unconstrained firms.

Keywords: Investment; Cash-flow; Financial constraint; Volatility; Cash stock (search for similar items in EconPapers)
JEL-codes: D92 G31 G10 (search for similar items in EconPapers)
Date: 2018
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