Financial constraints and the cash flow sensitivities of external financing: Evidence from Korea

Jin Park

Research in International Business and Finance, 2019, vol. 49, issue C, 241-250

Abstract: According to pecking order theory, the relationship between internal and external financing is negative because of the cost difference in raising funds. However, what if the role of debt and equity issuance differ in response to the cash flow? To address this, I examine 10,886 firm-year observations in Korea and find several intriguing findings. (1) Debt issuance is negatively related to cash flow as expected, but not for equity issuance. (2) The results are due to firms’ intention to issue new equity when their cash flow is positive. (3) Substitution between internal funds and debt is mostly driven by paying off short-term debt. (4) A negative relationship between internal and external financing (debt issuance) exists in the firm-years of positive and increasing cash flow. (5) Regarding financial constraints, pecking order theory is better demonstrated by financially unconstrained firms.

Keywords: Cash flow; External financing; Debt issuance; Equity issuance; Financial constraints (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:49:y:2019:i:c:p:241-250

DOI: 10.1016/j.ribaf.2019.03.007

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