Investment Strategy, Dividend Policy and Financial Constraints of the Firm

Chau-Chen Yang, Chung-Jiun Lin and Yi-Chen Lu
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Chau-Chen Yang: National Taiwan University, R.O.C.
Chung-Jiun Lin: National Taiwan University, R.O.C.
Yi-Chen Lu: Avanti Corporation, R.O.C.

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2000, vol. 03, issue 02, 235-267

Abstract: In the real world where the capital market is considered imperfect, firms are facing financing constraints due to the presence of asymmetric information and agency problems. Fazzari, Hubbar, and Petersen (FHP) (1988) propose the use of investment-cash flow sensitivity to investigate whether the firm has financing constraints. They find that the effect of cash flow on investment is larger for the low-pay-out firms. Later research such as Devereux and Schiantarelli (1989), Hoshi, Kashyap and Scharfstein (1991) and Kaplan and Zingales (1997) also followed FHP's method to do more research on financing constrains. FHP assume that the dividend policy of a firm is exogenous to the investment-cash flow relationship. We propose that the dividend policy of a firm is endogenous and use a two-stage Probit Selection model to deal with examination of the financing constraints of the firms. The empirical result shows that: 1) There exist some differences between the OLS model and Probit Selection Model, especially in the explanatory variable, Tobin'sq. 2) In the long run, firms that pay no dividend are observed to have significant financing constraints, compared with firms that pay dividends frequently.

JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219091500000121

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