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The Impact of Capital Market Imperfections on Investment-Cash Flow Sensitivity
Abstract
We examine the investment-cash flow sensitivity of US manufacturing firms in relation to five factors associated with capital market imperfections - fund flows, institutional ownership, analyst following, bond ratings, and an index of antitakeover amendments. We find a steady decline in the estimated sensitivity over time. Furthermore, we find that investment-cash flow sensitivity decreases with increasing fund flows, institutional ownership, analyst following, antitakeover amendments and with the existence of a bond rating. The overall evidence suggests that investment-cash flow sensitivity decreases with factors that reduce capital market imperfections.
... High ICFS not only restricts the sustainable development of enterprises but also leads to low efficiency of capital allocation in the whole society [19,20]. Although studies have demonstrated that institutional investors can reduce ICFS [21,22], no literature has focused on whether and how this particular behavior of institutional investors' SVs affects ICFS. This paper provides a thoughtful theoretical analysis and empirical test of the effects of institutional investors' SVs on ICFS in terms of both financing constraints and agency conflicts, extending the existing research on institutional investors and ICFS. ...
... As the major actors in capital markets, institutional investors play significant roles in alleviating information asymmetry and inhibiting institutional conflicts [2,11,47]. Agca and Mozumdar [21] demonstrate a significant negative association between institutional ownership and ICFS by analyzing the data of U.S. manufacturing companies from 1970 to 2001, suggesting that institutional investors play a pivotal role in compensating for capital market deficiencies. Based on US companies, Attig et al. [22] conclude that institutional investors' investment horizon is significantly negatively correlated with ICFS because institutional investors with longer investment horizons have stronger incentives to monitor effectively, and in turn, alleviates information asymmetry and agency conflicts. ...
... Through conducting SVs, institutional investors go deep into the company, and directly observe the company's operating environment to fully understand the company's real business situation, but also with the management, employees, and other face-to-face communication and exchange, to maximize access to private information that is not publicly available [23]. The timely disclosure of information from institutional investors' SVs enables external investors to easily obtain information about a company's characteristics, which helps to reduce the asymmetry of information between internal and external companies [21]. An increase in information transparency between investors and firms will increase the efficiency of the capital market in interpreting firm information so that external investors can more accurately understand and grasp the operation and future development of the firm's investment projects [53], thus inhibiting ICFS. ...
Taking Chinese non-financial A-share companies listed on the Shenzhen Stock Exchange (SZSE) between 2003 and 2018 as a sample, this paper empirically examines whether and how institutional investors’ site visits (SVs) affect corporate investment-cash flow sensitivity (ICFS). The results show that institutional investors’ SVs can reduce ICFS, and this effect is more obvious for companies with fewer investment opportunities, larger sizes, higher internal cash flows, and higher agency costs, indicating that institutional investors’ SVs primarily inhibit ICFS caused by agency conflicts rather than financing constraints. In addition, the inhibitory effect of institutional investors’ SVs on ICFS exists mainly in companies with poor internal supervision governance and weak executive compensation incentive mechanisms, indicating that institutional investors’ SVs and other forms of corporate governance mechanisms operate as substitutes in reducing ICFS. This paper reveals the important role of institutional investors’ SVs in reducing ICFS, with important theoretical and practical implications for regulators to progressively regulate and promote this form of investor activity.
... If the capital markets are less-developed and higher information asymmetry prevails, large dividends can also create a surge in external financing rates due to the reluctance of outside investors to provide funds to firms (Rozeff, 1982). When financing constraints prevail, firms have to retain cash in order to finance investment opportunities by avoiding costly external financing (Agca & Mozumda, 2008). ...
... An investment decision is one of the most important decisions that a firm ever makes. Mostly, scholars have focused on evaluating the effectiveness of investment decisions in their research because external and internal financing are no longer mutual substitutes, particularly in the existence of capital market imperfections (Agca & Mozumda, 2008). Therefore, a firm's investment decision completely links with the financing decision because the mode of financing influences its cost and ultimately affects the investment that a firm can make. ...
... Information asymmetry between insiders and external fund providers affects the cost of external funds. In the presence of external financing constraints, firms have to retain cash in order to finance investment opportunities by avoiding costly external financing (Agca & Mozumda, 2008). In such a case, firm-level corporate governance works to reduce information asymmetry between parties. ...
Information asymmetry between insiders and outsiders creates various issues for a firm, such as the agency problem where managers pursue their own interests even at the cost of the well-being of the firm’s shareholders, and probable external financial constraints where external investors discount risk by causing a surge in the cost of financing. Normally, a firm manages the issues of the agency problem and external financing constraints by omitting or initiating dividend payments. Therefore, this study investigated the impact of corporate governance on dividend policies in the presence of financial constraints using a sample of 139 non-financial firms listed on PSE, where a weak regulatory framework generates agency problems and the underdevelopment of the financial sector causes financing constraints for businesses. The results reveal that, in Pakistan, dividends are an Outcome of governance practices. As the quality of firm-level governance improves, shareholders are provided with the legal strength to ultimately force firm managers to pay dividends. Along with the agency problem, the availability of external financing is an important factor related to dividend payment decisions in Pakistan. When a company is confronted with agency problems and financial constraints simultaneously, managers try to avoid costly external financing rather than reducing the agency’s problem. The results of the study can be further refined by enhancing the study period and sample size. Furthermore, the work can be extended by classifying sample subjects to the nature of industry and group ownership.
... Therefore, relying on the standard Compustat universe, as it is done in many studies (see e.g. Cleary et al. 2007;Aǧca and Mozumdar 2008), runs into severe limitations as it covers predominantly the segment of large mature US firms. 2 In contrast, to circumvent these limitations, we test our hypothesis on a comprehensive German dataset that explicitly covers the SME segment. We obtain a data sample of 75,692 firm year observations (after data cleansing) out of which approximately 65% can be classified as SME. ...
... Thereby we complement and strengthen the mounting evidence for negative ICFS as already documented in various papers (see e.g. Allayannis and Mozumdar 2004;Cleary et al. 2007;Aǧca and Mozumdar 2008;Hovakimian 2009). ...
... Our analysis attempts to contribute to the clarification of this particular question. Our focus is thereby on a cross-sectional perspective and does not address the temporal variation in ICFS, such as Aǧca and Mozumdar (2008); Brown and Petersen (2009) and recently Christodoulou and Artem Prokhorov (2022) who discuss the apparently declining evidence for ICFS. ...
In order to identify the economic driver of negative investment-cash flow sensitivities (ICFS), we derive testable predictions from extending a theoretical investment model with endogenous financing costs (“revenue effect”) and contrast them with the corporate life-cycle hypothesis. We find that firms with (i) lower levels of long-term debt display stronger negative ICFS, and (ii) firms with more risky revenues invest more, which contradicts the predictions of the revenue effect. At the same time firms with strongly negative ICFS are (iii) smaller, (iv) younger and (v) have higher growth opportunities, which is consistent with the life-cycle hypothesis.
... Consequently, firms in more competitive (lessconcentrated) industries face higher financial constraints. Firms facing high levels of financial constraints tend to spend more internal funds and thus their cash holdings decrease (Agca & Mozumdar, 2008;Gilchrist & Himmelberg, 1995;Rungsomboon, 2005). It can be seen that the corporate innovation channel and the financial constraint channel have opposite effects. ...
... First, since it is difficult for firms to be externally funded, they spend more of their own funds for normal operations, and thus their cash reserves are lowered. Second, there is an indirect effect such that the more financial constraint a firm has, the lower its corporate investment (Agca & Mozumdar, 2008;Gilchrist & Himmelberg, 1995;Rungsomboon, 2005). Thus, the need for funds in financially constrained firms is reduced, which further reduces the cash holdings of these firms. ...
... Second, an increase in financial constraints could decrease the positive effect of R&D investment on corporate cash holdings. Financially constrained firms will have more difficulty in investing and finding external funds (Agca & Mozumdar, 2008;Angelopoulou & Gibson, 2007;Guariglia, 1999). For the sake of functioning normally, or at least surviving, firms cannot hold too much cash for smoothing R&D investment. ...
This study investigates the impact of market competition on corporate cash holdings. Specifically, we focus on the corporate innovation and financial constraint channels. Based on a sample of the Chinese stock market from 1998 to 2019, our empirical results show that cash holdings are negatively impacted by market competition, corporate innovation partially mediates this effect, and financial constraint exhibits full mediation. Moreover, the mediating effect of corporate innovation is moderated by financial constraints. Furthermore, the impact of market competition reveals an increasing trend as cash holdings increase with quantile regression. In addition, this impact is mitigated for state-owned enterprises, and firms with larger total assets are impacted to a lesser degree.
... Several studies have focused on the relationship between financial constraint, financial development, and firm investment, particularly the effect of financial constraint on firm investment, mainly in developed countries (Agca & Mozumdar, 2008;Bond et al., 1997;Chatelain et al., 2003;Chatelain & Tiomo, 2001;Love, 2003). Study on the effect of financial development on firm investment is still limited. ...
... Angelopoulou and Gibson (2007) and Kaplan and Zingales (1997) stated that a rise in US firm cash flow would lead to an increase in profit opportunities, improving the financial condition of firms and increasing liquidity and thus raising firm investment. Other studies have also found similar results, such as those by Agca and Mozumdar (2008), Bond et al. (1997), Chatelain and Tiomo (2001). Gaiotti and Generale (2001) found that the effect of firm cash flow on investment in Italy was higher in more financially constrained firms which were considered as small firms, compared with large ones. ...
... To examine the effect of firm financial constraint on firm investment, the study used the Euler equation as the baseline empirical model of firm investment. The Euler equation has been applied in many papers because the Tobin q model, which was previously used to estimate the investment model, has a measurement problem as the q value used in the model is correct only when there is perfect competition in the production market, fixed capital homogeneity, and no relationship between firm financial structure and investment decisions (Agca & Mozumdar, 2008;Rungsomboon, 2005). These are quite limiting assumptions and thus the Tobin q model is not a suitable proxy for estimation. ...
This paper examines the effect of firm financial constraint and financial development on firm investment using data from non-financial companies in Thailand from 1999Q1 to 2015Q4. The empirical results showed a significant effect of firm financial constraint on their investment. The cash flow of firms had a positive effect on firm investment, while the leverage ratio of firms had a negative effect. Financial development also weakened the effect of firm financial constraint on firm investment. These effects were considerably higher in more financially constrained firms than less constrained ones.
... Companies that operate in the world of perfectly efficient markets pay no taxes, have no transaction costs, and bankruptcy is possible, but there are no bankruptcy costs, agency difficulties, and information that is perfectly symmetric (Modigliani & Miller, 1958). An inefficient capital market can lead to underinvestment, overinvestment, or resource misallocation in the context of investment since it hinders the market's ability to function effectively (Senay & Abon, 2008). According to the pecking order hypothesis, under asymmetric information, firms should prioritize internal funding before debt and equity financing because external financing will result in adverse selection and lower business valuation (Myers & Majluf, 1984). ...
... Regaringy Senay and Abon (2008) evaluate the impact of imperfect capital markets on investment sensitivity to cash flow. They employ five variables-fund flow, institutional ownership, bond ratings, analyst follower count, and an indicator of anti-takeover laws-as indicators of imperfection in the capital market. ...
This paper examines the relationship between hālal investment sensitivity and cash flow, as well as the impact of capital market imperfections on investment sensitivity in ṣukūk -dependent companies versus conventional enterprises in six countries: Saudi Arabia, the United Arab Emirates,Kuwait, Qatar, Bahrain, and Malaysia. The research is based on panel data from 240 non-financially listed conventional and Islamic enterprises from 2018 to 2022. The study incorporates both analytical
and econometric approaches. Stationarity, co-integration, and multivariate Granger-Causality tests are carried out using the estimated equations. The study finds that there are considerable distinctions between ṣukūk -dependent firms and traditional enterprises. At the 5% significance level, both groups' investment expenditures responded significantly to cash flow. But hālal investment rises by 0.17 for
conventional businesses when current cash flow rises by $1. Market capital imperfections, as assessed by four factors, have a significant effect on hālal investment cash flow sensitivity. The sensitivity of hālal investments to cash flows diminishes when fund flows, analyst following, institutional ownership, and the corporate governance index increase. Finally, the Grnagel causality
tests confirm the study's alternative hypotheses. There is a bidirectional causal relationship between hālal investment and cash flow, while there is a unidirectional relationship from capital market imperfections to hālal investment-cash flow sensitivity.
... The existing literature generally finds a similar result, a positive and statistically significant association between corporate investment and internally generated cash flows (Allayannis & Mozumdar, 2004;Ağca & Mozumdar, 2008;Brown & Petersen, 2009;Lewellen & Lewellen, 2016;Moshirian et al., 2017;Larkin et al., 2018). Moreover, many empirical studies focus on aspects of the investment-cash flow relationship. ...
... In our next robustness test, we use the two-step system generalized method of GMM. This approach neutralizes the problem of endogeneity between investments and other explanatory variables in the investment model (e.g., Ağca & Mozumdar, 2008). The GMM results are reported in Table 11. ...
This study investigates investment-cash flow sensitivity during the COVID-19 economic crisis. Using an international sample of publicly listed firms, we find that the sensitivity of capital expenditures to cash flows is significantly reduced during the crisis. When we split the sample into strongly and weakly affected countries, we find that firms in countries affected more seriously by COVID-19 exhibit lower investment responsiveness to cash flows. We further find that investment-cash flow sensitivity is diminished when government aid is greater, firms have more cash on hand, and investment opportunities decline. Our results survive a host of robustness checks. This study contributes to the discussion on the impact of COVID-19 on corporate policies within an international framework.
... Thus, investment decisions are not affected by financing decisions. Therefore, the only determinants of investment are investment opportunities (Ağca and Mozumdar, 2008). The sales accelerator model was developed based on the idea that a company takes investment opportunities because of expected profitability. ...
... Practically, a different researcher uses different proxies for cash flow measurements. Those measurements are; (a) a net income before extraordinary items plus depreciation (Ağca and Mozumdar, 2008;Kaplan and Zingales, 1997), (b) an operating cash flow (Firth, Malatesta, Xin, and Xu, 2012), (c) earnings before interest, taxes, depreciation, and amortization or EBITDA (George, Kabir, and Qian, 2011), (d) a net income before extraordinary items plus depreciation and amortization (Chen and Chen, 2012), and (e) a net income before tax plus depreciation . Firth et al. (2012) stated that differences in those definitions could be considered minimal and statistically negligible. ...
This study aims to analyze how the company's internal funds and investment opportunities impact the company’s investment decisions conditional to the financing constraints experienced. We classify companies into three categories based on the SA�Index; low, neutral, and high-financing constraints. We analyze 278 non-financial companies listed on the Indonesia Stock
Exchange during 2014-2018 using multiple regression methods. There is an indication that companies experiencing a
financing constraint have a higher investment-cash flow sensitivity than companies with a low financing constraint. We
found that internal funds and investment opportunities positively and significantly affect companies' investment with high
financing constraints and companies with the neutral category. Meanwhile, we did not find a statistically significant
relationship between independent variables - the internal fund and investment opportunity - and investment for companies
with low financing constraints.
... Thus, investment decisions are not affected by financing decisions. Therefore, the only determinants of investment are investment opportunities (Ağca and Mozumdar, 2008). The sales accelerator model was developed based on the idea that a company takes investment opportunities because of expected profitability. ...
... Practically, a different researcher uses different proxies for cash flow measurements. Those measurements are; (a) a net income before extraordinary items plus depreciation (Ağca and Mozumdar, 2008;Kaplan and Zingales, 1997), (b) an operating cash flow (Firth, Malatesta, Xin, and Xu, 2012), (c) earnings before interest, taxes, depreciation, and amortization or EBITDA (George, Kabir, and Qian, 2011), (d) a net income before extraordinary items plus depreciation and amortization (Chen and Chen, 2012), and (e) a net income before tax plus depreciation . Firth et al. (2012) stated that differences in those definitions could be considered minimal and statistically negligible. ...
This study aims to analyze how the company's internal funds and investment opportunities impact the company’s investment decisions conditional to the financing constraints experienced. We classify companies into three categories based on the SA�Index; low, neutral, and high-financing constraints. We analyze 278 non-financial companies listed on the Indonesia Stock
Exchange during 2014-2018 using multiple regression methods. There is an indication that companies experiencing a
financing constraint have a higher investment-cash flow sensitivity than companies with a low financing constraint. We found that internal funds and investment opportunities positively and significantly affect companies' investment with high financing constraints and companies with the neutral category. Meanwhile, we did not find a statistically significant relationship between independent variables - the internal fund and investment opportunity - and investment for companies with low financing constraints.
... Their paper spurred a debate about the economic drivers behind the negative trend of I-CF sensitivity, which has since remained largely unresolved. Agca and Mozumdar (2008) find that I-CF sensitivity decreases with factors that reduce capital market imperfections but do not directly link the decline of I-CF sensitivity over time to the evolution of those factors. Chen and Chen (2012) conclude that financial constraints cannot explain the declining pattern of I-CF sensitivity as there is no indication of financial constraints becoming more relaxed over time. ...
... The extant literature on investment-cash flow sensitivity has largely focused on the effects of financial constraints (e.g., Agca and Mozumdar (2008) and Chen and Chen (2012)). Yet, relatively little attention has been devoted to investigating the impact of capital adjustment costs on the responsiveness of investment to extra cash flow. ...
It is well documented that since at least the 1970s investment-cash flow (I-CF) sensitivity has been decreasing over time to disappear almost completely by the late 2000s. Based on a neoclassical investment model with costly external financing, we show that this pattern can be explained by the gradual increase of capital adjustment costs, attributable to the accumulation of knowledge capital. The result is robust to a variety of approaches, including Euler equation estimation and the simulated method of moments. More generally, our findings demonstrate that I-CF sensitivity should only be interpreted as a joint measure of financial and real frictions.
... ةة الوكال ا ةدا ل ةة ي النظر ىذه تلسس وبالتالخ (Agency Motive) ةك وذل ةة بالنقدي ةركات الش ةاظ الحتف ةاس كأس اسة در إليو صشارت لما ت قا و (Harford, et al., 2008) . (Almeida, et al. 2004;Arslan, et al. 2006;Acharya, et al. 2007;Chang, et al. 2013 (Agca, et al., 2008;Ascioglu, et al., ةة اس در ةارت صش ةث حي ةركات؛ لمش (Agca, et al., 2008) Almeida et al. 2004;Arslan, et al., 2006;Faulkender and Wang, 2006;Denis and Sibilkov, 2010 (Minnick and Noga, 2010;Armstrong, et al., 2015;Edwards, et al., 2016;Chen, et al., 2010 (Desai and Dharmapala, 2009;Chen, et al., 2010;Kim, et al., 2011;Pinkowitz, et al., 2006 ...
... ةة الوكال ا ةدا ل ةة ي النظر ىذه تلسس وبالتالخ (Agency Motive) ةك وذل ةة بالنقدي ةركات الش ةاظ الحتف ةاس كأس اسة در إليو صشارت لما ت قا و (Harford, et al., 2008) . (Almeida, et al. 2004;Arslan, et al. 2006;Acharya, et al. 2007;Chang, et al. 2013 (Agca, et al., 2008;Ascioglu, et al., ةة اس در ةارت صش ةث حي ةركات؛ لمش (Agca, et al., 2008) Almeida et al. 2004;Arslan, et al., 2006;Faulkender and Wang, 2006;Denis and Sibilkov, 2010 (Minnick and Noga, 2010;Armstrong, et al., 2015;Edwards, et al., 2016;Chen, et al., 2010 (Desai and Dharmapala, 2009;Chen, et al., 2010;Kim, et al., 2011;Pinkowitz, et al., 2006 ...
... The second group are factors that fall outside the control of management. (Biddle & Hilary, 2006;Gugler et al., 2007;Ascioglu et al., 2008;Ağca & Mozumdar, 2008;Schleicher et al., 2010;Francis et al., 2013). ...
This study examines the effect of risk management assurance by the external auditors on investment efficiency. While prior literature has mainly examined the effect of assurance on voluntary nonfinancial disclosures on stakeholders’ decisions, there is a scarcity of studies that focused on the impact of risk management assurance on investment efficiency. The researcher conducted two types of studies, the first is an applied study which is interested in the relationship between the risk disclosure and investment efficiency using a sample of 376 observation from Egyptian firms listed on EGX100 between 2017 and 2022.. The second is a survey study interested in the relationship between the assurance on voluntary risk management disclosure and investment efficiency using 389 closed-ended questionnaires directed to the stakeholders of the Egyptian listed firms. The results of the applied study demonstrated a significant positive effect of risk disclosure on investment efficiency, where risk disclosure increases the overinvestment and decreases the underinvestment but leads in sum to more investment efficiency. In addition, the results of the survey study demonstrated a significant positive effect of assurance of risk management disclosures on investment efficiency where risk management assurance decreases both overinvestment and underinvestment.
... According to Alti (2003), however, the investment sensitivity was higher for young, small, high growth and low dividend-pay-out firms. However, Agca and Mozumdar (2005) argued that the investment sensitivity to a firm's cash flows was on continuous decline over the time. They also found that the decline in the investment sensitivity was due to increased supply of funds in the market as well as institutional ownership especially financial institutions. ...
... To verify the correctness of the results obtained, an assessment was also carried out for pVAR (see Table 4; the coefficient estimate of CF / K is 0.3652 and statistically significant). The implication, in sum, is that there are no grounds to reject the first research hypothesis (H1) [Fazzari, Hubbard, Peterson, 1988;Agca, Mozumdar, 2008]. This provides an argument in support of theories on the balance-sheet channel of monetary policy. ...
The aim of this paper is to verify the theory of the balance sheet channel among
Polish listed companies, especially during the COVID-19 pandemic period. This
objective was achieved by examining the relationship between cash flow and investment,
based on an Emerging Markets Information Services (EMIS) database covering
companies listed on the Warsaw Stock Exchange, including the bourse’s alternative
NewConnect market, and using panel econometric models (pooled OLS,
Fixed Effect Model, Random Effect Model and Panel VAR). It has been established
that there are no grounds to reject the hypotheses that investment is positively
associated with the cash flow of Polish listed companies and that the relationship
between investment and cash flow is particularly strong for financially constrained
companies. This means that there is evidence in support of the balance
sheet channel theories. The hypothesis that the relationship between cash flow and
investment is especially strong for financially constrained companies during the
COVID-19‑induced recession has been rejected. The main novelty of the paper
is that the balance sheet channel theory was verified for Polish listed companies,
with a particular emphasis on the COVID-19 pandemic period.
... After the FHP (1988) study, the cash flow sensitivity of investments in different markets was analyzed to determine whether companies have financial constraints (see Moyen, 2004;Lian and Cheng, 2007;Ağca and Mozumdar, 2008;Pál and Kozhan, 2009;Bond and Söderbom., 2009;Pindado, Requejo, and Torre, 2011). However, it is seen that different priority criteria have been introduced for grouping companies as financially restricted or non-financially restricted companies (see Fazzari, Hubbard, and Petersen, 1988;Kaplan and Zingales, 1997;Almeida et al. 2004;Beck et al., 2006;Hadlock and Pierce, 2010). ...
If financial markets are efficient, companies can easily access finance. However, due to market frictions in financial markets, it is often not easy to find suitable financing sources for investments. As a result of the market frictions, the growth of national economies slows down. In this study, this problem will be addressed for energy companies. In other words, we examine whether energy companies are faced with financial constraints using the data of energy companies in 13 selected countries between the years 2010-2021. The results show that cash flows created by energy companies in 7 countries are effective in financing their investments. High cash flows and increased investments resulting from fluctuations in energy prices may also indicate that companies exhibit excessive investment behavior due to agency problems. On the other hand, all stakeholders need to make timely investments in the energy sector compared to other industries to support energy policies and increase social welfare.
... (3) SA Index is used by the previous studies by (Aǧca & Mozumdar 2008;Machokoto et al. 2019;Mulier et al. 2016;Riaz et al. 2016). Riaz et al. (2016) use the natural logarithm of sales instead of the total assets as a size proxy. ...
This study analyzes cash-cash flow sensitivity by comparing financially constrained and unconstrained firms in eight markets. 486 manufacturing firms are examined between 2005 and 2018 using the Generalized Method of Moments. These firms are categorized based on size, age, and Size-Age, Sales-Age, and Kaplan and Zingales indices. We find that both constrained and unconstrained firms evince positive cash-cash flow sensitivity. Although unconstrained firms obtain external financing easily, they prefer to first use internally generated funds in accordance with the pecking order theory. The results also reveal that cash-cash flow sensitivity cannot be used to test financial constraints in emerging markets.
... The Q model is based on the assumption of perfect markets, however, in the presence of imperfect markets with financing frictions, the investments are sensitive to internal cash flows (Hoshi et al., 1991). The Q model has been adjusted by the addition of the availability of internal funds which is an additional determinant of investment (Agca and Mozumdar, 2008;George et al., 2011). One of the drawbacks of the Q model is the fact that it reflects the evaluations by the parties outside the firm, and in the presence of information asymmetries in financial markets, those parties cannot evaluate the future investment opportunities as the insiders can do (Carpenter & Guariglia, 2008). ...
This article investigates the investment cash flow sensitivity (ICFS) and the effect of leverage on the firms’ ICFS by using data from 66 non-financial companies from Muscat Securities Market, Oman for a 7-year period from 2013 to 2019. We used a dynamic panel investment model based on the Euler equation approach and ran dynamic panel regressions using the dynamic panel system generalized method of moments (GMM). We run two regressions: first, testing the sensitivity of investment to the availability of the internal funds; second, testing the effect of firms’ leverage levels on the sensitivity of investment to cash flows. The results showed a significant sensitivity of investment to cash flows for the sample companies. The positive coefficient for the cash flow variable indicates the presence of financing constraints. The results showed that leverage has a significant effect on the ICFS of the companies, indicating that the companies with higher leverage have ICFS.
... Family, local, and foreign institutional ownership are corporate governance indicators, and there is diversified evidence about the ownership structure's effect on the firm's cash holdings behavior (Liu, 2011;Chang et al., 2014, Nguyen & Rahman, 2020 . Finance policies like dividend payment (Harford et al., 2008;Moin et al., 2020) and capital expenditures (Aǧca & Mozumdar, 2008) also affect a company's cash holdings. Dittmar and Mahrt-Smith (2007) report that firms with better governance invest their excess cash reserves into more profitable investments than poorly governed counterparts. ...
This paper investigates how moving forward in a life-cycle stage affects a company’s cash holdings. Additionally, this research examines how institutional ownership affects a company’s cash holdings. We further test whether this ownership moderates the relationship between cash holdings and life-cycle stages or not. The empirical analysis is based on a sample of 1,305 observations in an unbalanced panel data set from 227 Turkish non-financial companies between 2015 and 2020. According to our analysis, moving forward through life-cycle stages has an increasing effect on cash holdings, and increased institutional ownership positively affects cash-holding behavior. Our robustness test also showed that increased foreign ownership increases the cash holdings as the companies move forward in their life cycle stages. On the other hand, local institutional ownership decreases cash holdings behavior. This paper implies that companies reaching their decline stage will hold more cash. The investors of these companies may expect fewer investments, thus growth opportunities from these firms because instead of utilizing these funds, the management will prefer to keep these funds unused.
... Hence, they did not propose that managers signal their information through financing decisions, or that asymmetric information might prevent managers from accepting positive NPV projects. But the perfectly efficient market does not exist (Agca & Mozumdar, 2008). ...
... Recentemente, a utilização de índices de governança corporativa amplos, elaborados a partir de perguntas objetivas e que resumem em uma única medida diversos mecanismos e práticas de governança, têm tido destaque na determinação dessa qualidade (Klapper & Love, 2002;Gompers, Ishii & Metrick, 2003;Black, Jang & Kim, 2006;Agca & Mozumdar, 2008;Francis et al., 2013). (Silveira et al., 2009;Lameira et al., 2010;Catapan & Colauto, 2014;Barros et al., 2015;Silva et al., 2019). ...
RESUMO
Este estudo teve como objetivo investigar a relação entre governança corporativa e restrição financeira no Brasil. Com tal finalidade, foi construído um painel não balanceado formado por 248 companhias brasileiras ao longo de 2006 a 2015. A qualidade das práticas de governança foi medida por meio do Índice de Práticas de Governança Corporativa (IPGC), enquanto os índices KZ, WW e FCP foram usados como proxies para o grau de restrição financeira. Os resultados do teste de Mann-Whitney, do teste de correlação de Spearman e de modelos de regressão linear indicaram que há uma relação negativa entre qualidade da governança corporativa e restrição financeira. Esses resultados foram interpretados como uma evidência de que a adoção de melhores padrões de governança pode reduzir restrições financeiras ao mitigar assimetria informacional e conflitos de agência.
Palavras-chave: Governança corporativa, restrição financeira, IPGC.
... Many researchers, among them,Bernanke and Gertler (1989),Gertler (1992),Greenwald and Stiglitz (1993),Kiyotaki and Moore (1997),Schiantarelli (1996),Almeida and Campello (2007),Agca and Mozumdar (2008) andGuariglia (2008), have examined the effects of these imperfectionsthrough changes in the external finance premiumon business investment policy.4 The consequences on aggregate economic activity will be more serious after a tightening of monetary policy for borrowers whose investment depends, to a great extent, on bank credit. ...
The Working Paper Series disseminates research papers of high quality and often of a more technical nature relevant to the various areas of interest to the Bank. They constitute "work in progress" and are published to stimulate discussion and contribute to the advancement of knowledge of economic matters. They are addressed to experts, so readers should be knowledgeable in economics. Working Papers are available in electronic format only (pdf).
... These include the difficulties involved in measuring Tobin's Q in the investment equations, the use of an unreliable priori classification of the different samples, constant value for Tobin's Q (investment opportunities), and contrary results to the usual I/CF relationship being found. Some examples include Allayannis and Mozumdar (2004), Agca and Mozumdar (2008), Brown and Petersen (2009). In some cases, a very weak relationship between I/CF was obtained. ...
This paper presents the evolution of the non-performing loans in the total banking assets between 2009-2015 in Romania and trying to highlight the relationship between the evolution of NPLs and GDP growth, money supply (M3) evolution rate and inflation rate.
... This is because companies that are more financially limited will have relatively low liquidity and capital and higher default risk. As a result, the more financial constraints the company has, the lower the company's investment, because the company will have greater difficulty in investing and finding external funding sources (Agca & Mozumdar, 2008;Butzen, Fuss, & Vermeulen, 2001;Gilchrist & Himmelberg, 1995;. ...
This research is a conceptual paper that aims to determine the effect of cash flow and investment opportunity for investment decisions in fixed assets on financially constrained companies. This type of research is explanatory research with companies in the property and real estate sectors listed on the Indonesia Stock Exchange in 2016-2018 as a population.This research will be conducted to predict how much the level of investment decisions is influenced by cash flow and investment opportunities with financial constraints as intervening variables. Based on previous research, shows differences in research results, so the authors aim to see the results of research on companies in Indonesia with different conditions and measurement variables.
... Recentemente, a utilização de índices de governança corporativa amplos, elaborados a partir de perguntas objetivas e que resumem em uma única medida diversos mecanismos e práticas de governança, têm tido destaque na determinação dessa qualidade (Klapper & Love, 2002;Gompers, Ishii & Metrick, 2003;Black, Jang & Kim, 2006;Agca & Mozumdar, 2008;Francis et al., 2013). (Silveira et al., 2009;Lameira et al., 2010;Catapan & Colauto, 2014;Barros et al., 2015;Silva et al., 2019). ...
This study aimed to investigate the relationship between corporate
governance and financial constraint in Brazil. To this end, we construct an
unbalanced panel of 248 Brazilian companies from 2006 to 2015. The quality of
corporate governance practices was measured by the Corporate Governance
Practices Index (IPGC), while KZ, WW and FCP indexes were used as proxies for
the degree of financial constraint. The results of the Mann-Whitney test, the
Spearman correlation test and linear regression models showed that there is a
negative relationship between corporate governance and financial constraint. We
interpreted these results as evidence that the adoption of better governance
standards can reduce financial constraints by mitigating informational asymmetry and
agency conflicts.
... One would also expect that differences in the cost of capital affect real investments. Agca and Mozumdar (2008) provide some evidence on this effect. Edmans et al. (2013) find a "positive effect of stock liquidity on blockholder governance." ...
... Nessas empresas, o fluxo de caixa apresenta relação positiva e significante com o investimento, o que Fazzari et al. (1988) chamaram de hipótese da monotonicidade. Vários estudos subsequentes corroboraram essas evidências (Terra, 2003;Agca & Mozumdar, 2008;Wei & Zhang, 2008;Aldrighi, Kalatzis & Pellicani, 2011;Francis et al., 2013;Chowdhury, Kumar & Shome, 2016). Contudo, outra corrente contesta fortemente esses resultados, apresentando evidências da relação positiva e significante entre investimento e fluxo de caixa, porém, para empresas menos restritas financeiramente (Kaplan & Zingales, 1997;Cleary, 1999;Allayannis & Mozumdar, 2004;Almeida & Campello, 2007;Aldrighi & Bisinha, 2010;Madeira, 2013). ...
This study aimed to investigate the investment-cash flow sensitivity for Brazilian companies with different degrees of financial constraint according to the quality level of their corporate governance practices. An investment model was estimated through GMM for a panel data of 248 Brazilian publicly traded companies, which were a priori classified in two groups of financial constraint degrees (high and low) according to the Corporate Governance Practices Index (IPGC). The results showed that the quality of corporate governance influences the investment-cash flow sensitivity, and this sensitivity is negative and significant only for firms with poor governance, classified with high financial constraint. Furthermore, it can be concluded that IPGC proved to be an interesting variable for a priori classification of companies and an important determinant of the investment-cash flow sensitivity to identify potentially financially constrained firms.
... Interestingly, there are studies which observe this topic from a different perspective -investigating the influence of flaws in the money market on the investment environment (Ağca and Mozumdar, 2008;Carpenter and Petersen, 2002;Fazzari et al., 1988;Hubbard, 1998;Ndikumana, 1999). This perception may increase the importance of bank financing, strengthening the relationship between bank finance access and firm growth. ...
The study examined the influence of Islamic and/or conventional bank financing on the growth of firms. The data were based on 113 firms in a Middle East country-Jordan-that implemented a dual-banking system from 2007 to 2016. The finding revealed that the implementation of either type of bank financing, be it Islamic and/or conventional, affect the growth of the firms. The study observed that Islamic bank financing had a more significant effect on the growth of the firms. Following the results of this study, stakeholders, managers, and investors are expected to change their views on Islamic bank financing, which is currently viewed as a part of religious practice. It may lead to the utilization of Islamic bank financing by firms. It should be noted that this study is one of the first empirical studies on the impact of Islamic bank financing on the growth of firms.
... 7. Another related work that focuses on U.S. firms is Baum, Caglayan, and Talavera (2009), from which we depart by exploiting cross-firm and cross-country heterogeneity among emerging markets (as in Love 2003, Love and Zicchino 2006, Magud and Sosa 2015, 2017. See also Agca and Mozumdar (2008), Allayannis and Mozumdar (2004), Ascioglu, Hegde, and McDermott (2008), Bhagat, Moyen, and Suh (2005), Brown and Petersen (2009), and Chen and Chen (2012) for more general arguments for time-varying investment sensitivity to cash flow. (Bernanke, Gertler, and Gilchrist 1999) with bankruptcy costs as a type of financial friction. ...
We examine how cross‐firm and cross‐country heterogeneity shapes the responses of corporate investment in emerging markets to changes in U.S. monetary policy and financial‐market volatility, the latter proxying for uncertainty. We find that in response to increases in U.S monetary policy rates or financial‐market volatility, financially weaker firms reduce investment by more than financially strong firms. We also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty. Finally, we find that stronger macroeconomic fundamentals (lower public debt or higher international reserves) help to buffer corporate investment from increases in U.S. monetary policy rates.
... Adding to the debate on the interpretation of investment-cash flow sensitivity, its sharp decline in the U.S and other countries, Allayannis and Mozumdar (2004) recorded a decline in investment-cash flow sensitivity over the period from 1977 to 1996, particularly for the most constrained firms. Ağca and Mozumdar (2008) suggested that investment-cash flow sensitivity decreases with factors that reduce capital market imperfections. Islam and Mozumdar (2007) found a negative relationship between cross-country financial development and the importance of internal capital for investment decisions. ...
This study examines the impact of financial development on corporate investment in terms of their influence on financing constraints. This study also tries to find the effect of financial development on the investment-cash flow sensitivity across the size, degree of financial constraints and group affiliation of the firm. This study employs dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique. The estimation results reveal that cash flow affects the investment decision of the company positively, which implies that Indian firms are financially constrained. Also, we observe that financial development reduces the investment-cash flow sensitivity and the effect of financial development is more prominent for small size and standalone firms. The results are robust across the period and, for both financially constrained and unconstrained firms. This study contributes to the existing literature by analyzing the impact of financial development on the role of cash flow in determining investments undertaken by the Indian firms, which is an unexplored issue from an emerging market perspective.
... We postulate that firms with higher intensity of fixed capital usage tend to have lower financial constraints. Previous studies (e.g., Agca & Mozumdar, 2008;Rungsomboon, 2005) suggest that firms with higher financial constraints are less able to find external sources of funds and to spur productive investment. For such firms, greater financial depth can reduce firm dependence on internal funding by increasing external funding sources and investment opportunities (e.g. ...
Using a survey of 41,862 manufacturing firms in Indonesia from 2004 through 2013, this study documents that firms in provinces with deeper financial infrastructure exhibit better performance in general; but this is true especially for firms with higher financial constraints (measured by a low-intensity use of fixed capital), and only when financial depth at the province level already exceeds a certain level. That is, this paper documents the presence of firm-level and province-level thresholds in the nexus between financial deepening and firm performance. It is important to consider such conditioning factors, in addition to boosting financial development, in order to improve manufacturing firms' performance and thus industrialization in Indonesia.
... To rule out this The results remain qualitatively similar when we add R&D with SG&A expenses. 7 See, for example, Allayannis and Mozumdar (2004), Agca and Mozumdar (2008), Ascioglu et al. (2008), Brown and Petersen (2009), and Chen and Chen (2012). possibility, we exclude the U.S. from our analysis and find that the results shown in the last four columns of the panel remain materially unchanged. ...
This study examines investment-cash flow (ICF) sensitivity across international markets and shows that the sensitivity has been stable in poor countries, but has experienced a sharp decline over time in firms located in rich countries. Our results suggest that the growing wealth of economies worldwide and relaxation of financial constraints at the firm level have led to the disappearance of ICF sensitivity in rich, highly developed countries but not in poor developing ones. We show that access to external finance, especially equity finance, is a key channel through which country-level development affects the sensitivity of investment to internal cash flow. Our evidence suggests that the amount of available economic resources and allocation efficiency are two necessary conditions that ensure the viability of the equity channel.
... We postulate that firms with higher intensity of fixed capital usage tend to have lower financial constraints. Previous studies (e.g., Agca & Mozumdar, 2008;Rungsomboon, 2005) suggest that firms with higher financial constraints are less able to find external sources of funds and to spur productive investment. For such firms, greater financial depth can reduce firm dependence on internal funding by increasing external funding sources and investment opportunities (e.g. ...
... Thus, this study joins a number of other studies documenting similar evidence for corporate investment and capital structure, however, in the context of a developing country. Fazzari et al. (1988), in their pioneering work, and several other studies such as Agca and Mozumdar (2008), Hoshi et al. (1991), Lamont (1997) and Campello et al. (2010) found that financial constraints affect real variables such as investment. ...
Understanding the effect of financial constraints on firms' real decisions requires accurate identification of financially constrained firms. Unfortunately, identifying financially constrained firms is a challenge that is yet to be resolved. Against this background, this study identified financially constrained firm-years in Kenya and evaluated how well proxies of financial constraints generated in an endogenous switching regression context measure financial constraints. About 66% of the firm-years in the sample considered are suffering from financial constraints. This suggests that financial constraint problem is affecting a higher number of firms over a longer period of time. Furthermore, there is no efficiency gain in using endogenous switching regression indices since the sample separation produced by the initial values outperformed endogenous switching regression final classification values. In particular, size-age measure does a better job of identifying financially constrained firms and producing consistent results, and is the only measure that approximates experienced financial constraints well.
... This approach studies the effect of behavioral biases on corporate decision. 1 In sum, the literature review on the field of investment cash flow sensitivity proposes three explanations to this phenomenon (see figure 1). From standard finance point of view, agency problems and asymmetric information can lead to investment cash flow sensitivity. ...
In this paper, we present a literature review and classification scheme for investment cash flow sensitivity under behavioral corporate finance (hereafter, BCF). The former consists of all published articles between 2000 and 2011 in different journals that are appropriate outlets for BCF research. The articles are classified and results of these are presented and analyzed. The classification of articles was based on nine criteria; journals, date of publication, paper nature, the context of the study adopted behavioral biases, adopted approach, behavioral biases measurement, the adopted assumption, econometric approach and empirical findings. Literature on investment cash flow sensitivity under behavioral corporate finance isn’t well developed. In fact, the behavioral corporate finance is very young. Our review shows that behavioral biases (optimism and overconfidence) have an explanatory power and they can succeed to explain the dependence of corporate investment on the internal cash flow availability. This result is protected in the most cases by the some restrictive assumptions: the absence of agency costs and asymmetric information. Based on the review, suggestions for future research are likewise provided.
... Apesar de a sensibilidade do investimento ao fluxo de caixa ser muitas vezes usada como uma medida de restrição financeira, 1 essa interpretação é contestada por alguns estudos. Dentre eles, os trabalhos de Chen & Chen (2012), Ağca & Mozumdar (2008) e Moyen (2004) mostram que a sensibilidade do investimento ao fluxo de caixa vem decrescendo ao longo dos anos, mesmo em períodos de crises financeiras mundiais e recessão econômica. De uma forma geral, os principais argumentos que divergem da conclusão de Fazzari et al. (1988) residem no fato de: i) não haver razões teóricas para que a relação entre o investimento e o fluxo de caixa represente restrição financeira (Erickson & Whited, 2000;Gomes, 2001); ii) a sensibilidade do investimento ao fluxo de caixa pode ser vista como um indicador de que a firma estaria aproveitando grandes oportunidades de investimento visando rentabilidade futura (Cleary, 1999;Kaplan & Zingales, 1997); ou ainda, iii) essa sensibilidade reflete o superinvestimento causado por problemas de agência entre gestores e acionistas (ou controladores e minoritários) dados os incentivos que os primeiros possuem em expropriar recursos da firma (Pawlina & Renneboog, 2005;Wei, 2008). ...
This study investigates the impact of corruption on investment decisions of Brazilian public firms. The findings show a strongly negative effect of corruption on investment-cash flow sensitivity, evidencing that, in this case, firms tend to cancel or postpone investments. These results are mainly found in the areas of enterprise management and family firms. When corruption is considered, state-owned companies of the electricity, gas, and water industries show the investment-cash flow sensitivity about seven times higher than that of non-state firms, indicating potential agency problems.
Firms operating in the same country normally offer different levels of corporate governance practices. Therefore, it is very important to properly gauge firm-level corporate governance. Eventually, the influence of financial constraints on dividend policies also varies across different corporate governance regimes (i.e., strongly and weakly governed regimes). The current study intends to investigate the impact of corporate governance on dividend policy by explicitly considering the role of external financing constraints faced by firms on listed in the KSE. To investigate how the changes in firm-level governance affect its dividend policy, the sample in the present study was divided into two groups on the bases of corporate governance variables, which were determined via ESM. The results of the ESM analysis suggest that the effect of financial constraints on dividend policies indeed varies across different corporate governance states. Firms in a weak corporate governance regime are especially apt to pay lower dividends in order to avoid costly external financing. Due to the existence of a high agency problem in weakly governed firms, external investors discount the risk of expropriation by requiring a high cost for their capital as a reward for monitoring costs.
We assess whether social capital, captured by CSR, is an effective hedge against risks arising from political and market competition risk. Having a higher CSR score significantly reduces stock return volatility during political uncertainty, but not cash flow volatility. Meanwhile, CSR is also an effective hedge against stock return volatility that arises from peer competition. Finally, the hedging effect of CSR on stock return volatility is transient, but has a positive effect on firms’ future performance and growth opportunities.
Cash flow has been major determinant of investment in the most of the studies conducted in the area of finance. So have the studies related to financing of ships related investment projects within the maritime industry. However, the exact role of cash flow to determine the investment specially in the Maritime sector remained ambiguous. This research has been conducted mainly to investigate the relationship between investment and internal generated fund while the information is asymmetric in the Maritime and financial realms and environment of Pakistan. The Q model of investment has been used to investigate this relationship. The GMM model has been applied to test the hypothesis by using the balanced panel annual data of Pakistani listed non-financial KSE 100 index firms for the period 2009 to 2018. The empirical analysis includes 100 sample firms with 600 observations. The five measures of asymmetric information (i.e. Tobin’s Q, ownership concentration, firm size, profitability and the financial leverage) have been used in this study. The results derived by using all five measures of asymmetric information confirm the positive and statistically significant relationship between internal finance and firm’s investment when firms have information which is asymmetric in nature. This study contributes to the investment decisions in Maritime markets as well as other capital markets that are imperfect like Pakistan consisting of information asymmetries.
This study intends to examine the effects of market inefficiencies on corporate investments through a literature review. This study finds that there are three types of market efficiencies-allocation, operational and informational efficiency, and allocation efficiency depends more on informational and operational efficiency. Furthermore, the investors cannot beat the market and earn more profit if the market is efficient; however, the degree of efficiency varies across markets; thus, the markets are categorized into three forms of market efficiency. In the existence of asymmetric information, the corporate prefers to raise funds by issuing debts and invest less amount. The study ascertained that transaction costs, anomalies, asymmetric information, information unavailability, and discrepancy of investors cause capital market inefficiency which further affects the corporate investment decisions.
We demonstrate that the severity of financial constraints has declined over time for two reasons: (i) improved access to external funds as evidenced by a decreased reliance on internal cash flows, and (ii) an inward shifting investment frontier with reduced investment opportunities. The decline in financial constraints coincides with the documented diminishing sensitivity of investment to cash flows, yet we show that cash flows remain a determining factor in helping constrained firms overcome restricted access to external capital. There is a flight‐to‐quality during economic shocks, where the adverse effects following periods of tightened credit are particularly pronounced for smaller firms, with larger firms appearing largely unaffected.
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According to a recent conjecture in the literature, earnings have become a poorer proxy for cash flow from operations over time. We find that since 1988, when cash flow statements started to be consistently reported in Compustat, the cash effectiveness of earnings has actually increased for a large sample of U.S. manufacturing firms. This occurs despite the introduction of fair value accounting and increasing accounting accruals during the last three decades. Also contrary to the conjecture, using more comprehensive measures of cash flow does not restore the investment‐cash flow sensitivity, which continues to be around 0.05 in more recent periods. This article is protected by copyright. All rights reserved
This research is aimed to analyze the managerial behavior in earnings report, so it investigates the relation of investment inefficiency and financial constraints to earnings management. Earnings management is measured based on Kothari et al (2005) model and investment inefficiency is measured based on the Fazzari et al (1988), Kaplan & Zingales (1997) and Linck et al (2013) models. Financial constraints is measured based on some criteria like net financial leverage, free cash flow, interest rate, dividend payout, operational cash flow, size and age of firms. The sample consists of 260 firms listed in Tehran Stock Exchange over the period from 2009 to 2015. Hypotheses are tested based on panel multivariate regression model. The results show a significant and positive relation between investment inefficiency and earnings management; while there is no significant relation between financial constraints and earnings management.
Quarterly Financial Accounting
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Managers of any organization have an effective role in the success of the organization and can resolve and prevent the occurrence many problems. However, the ability of various managers is different. Therefore, the purpose of this paper is experimental study of the relationship between managerial ability and financial constraints of companies listed on the Tehran Stock Exchange. Statistical sample consisted of 131 companies in the period of 2007-2014. Data envelopment analysis (DEA) is used to measure the managerial ability and logit regression is used to test research hypotheses. The research findings suggest that there is a significant relationship between managerial ability and financial constraints of companies. Also, there is no significant difference between the managerial ability in various industries.
Keywords: Data envelopment analysis, Financial constraints, Managerial ability
The investment literature has long acknowledged the time‐ and frequency‐varying dynamics of the relationship between investment, Tobin's Q and cash flow. In this paper, we use continuous wavelet tools to estimate and assess the relationship between these variables simultaneously at different frequencies and over time. We find that (i) Q and cash flow are complementary sources of information for investment, the former being more important for firms’ investment decisions in the medium‐to‐long run and the latter at business cycles frequencies; and (ii) investment‐Q sensitivity declines over time at all frequencies, while investment–cash flow sensitivity declines at business cycles frequencies but remains largely stable over the medium‐to‐long run.
The current research investigates Econometric Analysis of Investment and Internal Finance under Asymmetric Information: A Case Study of Manufacturing companies of Pakistan. This study also aims to explore the relationship between internal finance and corporate investment outlays of Pakistani manufacturing firms in the presence of asymmetric information in the capital market. The fixed effect model has been employed on a sample of conveniently selected 272 listed manufacturing firms (with 2720 observations) over the period 2001 to 2010. Two different proxies of asymmetric information (i.e. Firm size & age) are used. Based on each of these two measures the sample is split into two subsamples (i.e. Small & large size and young & old firms respectively). Firms with small size and young firms are facing the asymmetric information while the other two subsamples are not considered so. The results based on all of the two measures indicate that there is a statistically significant and positive relationship between investment and internal finance or the cash flows. The investment of those firms where there is asymmetric information (i.e. small size, and young firms) such firms are more sensitive to the changes in their internal finance.
Запропоновано поняття інноваційно–інвестиційної чутливості підприємства. Розроблено математичну модель оцінки інноваційно–інвестиційної чутливості підприємства, яка базується на розрахунку середньозваженої вартості інноваційно–інвестиційного капіталу та оцінці впливу зміни параметрів на його величину. Практичне використання запропонованого методу дозволяє враховувати фактори внутрішнього і зовнішнього впливу; оцінювати вплив одночасно кількох параметрів на інноваційно–інвестиційну чутливість підприємства. Запропонований науковий підхід дозволяє оцінити стійкість основного фінансово–економічного результату (валового прибутку) до зміни параметрів, що впливають на рівень інноваційно–інвестиційної спроможності підприємства.
This paper finds foreign direct investment (FDI) significantly reduces the investment-cash flow sensitivity of United State firms. Using both an instrumental variable method and a quasinatural experimental setting, I identify a causal linkage from increased FDI to reduced investment-cash flow sensitivity. Further analysis indicates that the impact of FDI is because of the reduced liquidation value of physical assets that FDI causes. In turn, this reduced value restricts the borrowing capacity of domestic firms and their further capital investment. Increasing FDI also helps explain why the investment-cash flow sensitivity has declined over time. These findings together provide new evidence of the credit chain effect (Almeida and Campello, 2007) and the importance of FDI-induced financing difficulties on host-country firms' capital investments.
We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990 through 2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with strongest management rights (strongest antitakeover provisions) and firms with strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about thirty-four basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.
This paper examines how the investment of financially constrained firms varies with their level of internal funds. We develop a theoretical model of optimal investment under financial constraints. Our model endogenizes the costs of external funds and allows for negative levels of internal funds. We show that the resulting relationship between internal funds and investment is U-shaped. In particular, when a firm's internal funds are negative and sufficiently low, a further decrease leads to an increase in investment. This effect is driven by the investor's participation constraint: when part of any loan must be used to close a financing gap, the investor will provide funds only if the firm invests at a scale large enough to generate the revenue that enables the firm to repay. We test our theory using a data set with close to 100,000 firm-year observations. The data strongly support our predictions. Among other results, we find a negative relationship between measures of internal funds and investment for a substantial share of financially constrained firms. Our results also help to explain some contrasting findings in the empirical investment literature.
This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time.
We consider a multiple mismeasured regressor errors-in-variables model where the measurement and equation errors are independent and have moments of every order but otherwise are arbitrarily distributed. We present parsimonious two-step generalized method of moments (GMM) estimators that exploit overidentifying information contained in the high-order moments of residuals obtained by partialling out perfectly measured regressors. Using high-order moments requires that the GMM covariance matrices be adjusted to account for the use of estimated residuals instead of true residuals defined by population projections. This adjustment is also needed to determine the optimal GMM estimator. The estimators perform well in Monte Carlo simulations and in some cases minimize mean absolute error by using moments up to seventh order. We also determine the distributions for functions that depend on both a GMM estimate and a statistic not jointly estimated with the GMM estimate.
I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the "cost of capital" or "q"). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a "financing hierarchy," in which internal finance has important cost advantages over external finance. We build on recent research concerning imperfections in markets for equity and debt. This work suggests that some firms do not have sufficient access to external capital markets to enable them to respond to changes in the cost of capital, asset prices, or tax-based investment incentives. To the extent that firms are constrained in their ability to raise funds externally, investment spending may be sensitive to the availability of internal finance. That is, investment may display "excess sensitivity" to movements in cash flow. In this paper, we work within the q theory of investment, and examine the importance of a financing hierarchy created by capital-market imperfections. Using panel data on individual manufacturing firms, we compare the investment behavior of rapidly growing firms that exhaust all of their internal finance with that of mature firms paying dividends. We find that q values remain very high for significant periods of time for firms paying no dividends, relative to those for mature firms. We also find that investment is more sensitive to cash flow for the group of firms that our model implies is most likely to face external finance constraints. These results are consistent with the augmented model we propose, which takes into account different financing regimes for different groups of firms. Some extensions and implications for public policy are discussed at the end.
We examine investment behavior when firms face costs in the access to external funds. We find that despite the existence of liquidity constraints, standard investment regressions predict that cash flow is an important determinant of investment only if one ignores q. Conversely, we also obtain significant cash flow effects even in the absence of financial frictions. These findings provide support to the argument that the success of cash-flow-augmented investment regressions is probably due to a combination of measurement error in q and identification problems.
We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s. Copyright 2004 by The American Finance Association.
This investigation of the cross-section of mutual fund equity holdings for the years 1991 and 1992 shows that mutual funds have a significant preference towards stocks with high visibility and low transaction costs, and are averse to stocks with low idiosyncratic volatility. These findings are relevant to theories concerning investor recognition, a potential agency problem in mutual funds, tests of trend-following and herd behavior by mutual funds, and corporate finance.
In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
Many large corporations have recently adopted antitakeover charter amendments which make the transfer of corporate control more difficult. This paper develops and tests competing theoretical explanations for the passage of these amendments. In one view, antitakeover provisions are adopted because incumbent management seeks job protection at stockholders' expense. The alternative hypothesis is that antitakeover provisions benefit stockholders, perhaps by extracting greater payment in exchange for corporate control. Although inconclusive, the evidence provides weak preliminary support for the hypothesis that antitakeover amendments are best explained as a device for managerial entrenchment.
This paper reviews much of the scientific literature on the market for corporate control. The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose. The gains created by corporate takeovers do not appear to come from the creation of market power. With the exception of actions that exclude potential bidders, it is difficult to find managerial actions related to corporate control that harm shareholders. Finally, we argue the market for corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.
Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow. Paralleling these findings is the disappointing performance of the q theory of investment: even though marginal q should summarize the effects of all factors relevant to the investment decision, cash flow still matters. We examine whether this failure is due to error in measuring marginal q. Using measurement error-consistent generalized method of moments estimators, we find that most of the stylized facts produced by investment-q cash flow regressions are artifacts of measurement error. Cash flow does not matter, even for financially constrained firms, and despite its simple structure, q theory has good explanatory power once purged of measurement error.
We review theory and evidence relating to herd behaviour, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behaviour of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others.
I analyze the sensitivity of a firm's investment to its own cash flow in the benchmark case where financing is frictionless. This sensitivity has been proposed as a measure of financing constraints in earlier studies. I find that the investment–cash flow sensitivities that obtain in the frictionless benchmark are very similar, both in magnitude and in patterns they exhibit, to those observed in the data. In particular, the sensitivity is higher for firms with high growth rates and low dividend payout ratios. Tobin's q is shown to be a more noisy measure of near-term investment plans for these firms.
We survey two generations of research on corporate governance systems around the world, concentrating on countries other than the United States. The first generation of international corporate governance research is patterned after the US reasearch that precedes it. These studies examine individual governance mechanisms - particularly board composition and equity ownership - in individual countries. The second generation of international corporate governance research recognizes the fundamental impact of differing legal sysems on the structure and effectiveness of corporate governance and compares systems across countries.
Recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks. Evidence for such a mechanism (also known as the ‘financial accelerator’) consists largely of firm-level studies showing that cash flow is an important predictor of investment. But this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities. In this paper, we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a ‘fundamental’ versus its role in alleviating credit frictions. For firms with access to commercial paper and bond markets, we find that the perfect capital markets model of investment can fully account for the role of cash flow. For firms with only limited access to capital markets (as indicated by lack of participation in public debt markets) however, investment appears to be ‘excessively’ sensitive to fluctuations in cash flow. These results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator.
We quantify the empirical relevance of the pecking order hypothesis using a novel empirical model and testing strategy that addresses statistical power concerns with previous tests. While the classificatory ability of the pecking order varies significantly depending on whether one interprets the hypothesis in a strict or liberal (e.g., “modified” pecking order) manner, the pecking order is never able to accurately classify more than half of the observed financing decisions. However, when we expand the model to incorporate factors typically attributed to alternative theories, the predictive accuracy of the model increases dramatically—accurately classifying over 80% of the observed debt and equity issuances. Finally, we show that what little pecking order behavior can be found in the data is driven more by incentive conflicts, as opposed to information asymmetry.
Analyst research helps prices reflect information about a security's fundamentals.
However, analysts' private incentives potentially contribute to misleading research and
it is possible that the market fixates on such misleading and/or optimistic reports. We
examine cross-sectional determinants of the informativeness of analyst reports, i.e.,
their effect on security prices, controlling for endogeneity among the factors affecting
informativeness. Analysts are more informative when the potential brokerage profits
are higher (e.g., high trading volume and high volatility) and when they reveal "bad
news." Analyst informativeness is reduced in circumstances of increased information
processing costs. We fail to find evidence that informativeness of analyst reports is due
to market's fixation or over- or under-reaction to analyst reports.
How important are cross-stock common factors in the price discovery/liquidity provision process in equity markets? We investigate two aspects of this question for the 30 Dow stocks. First, using principal components and canonical correlation analyses we find that both returns and order flows are characterized by common factors. Commonality in the order flows explains roughly two-thirds of the commonality in returns. Second, we examine variation and common covariation in various liquidity proxies and market depth (trade impact) coefficients. Liquidity proxies such as the bid–ask spread and bid–ask quote sizes help explain time variation in trade impacts. The common factors in these liquidity proxies are, however, relatively small.
Traditionally and understandably, the microscope of market microstructure has focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liquidity nor to their empirical manifestation, correlated movements in liquidity. But a wider-angle lens exposes an imposing image of commonality. Quoted spreads, quoted depth, and effective spreads co-move with market- and industry-wide liquidity. After controlling for well-known individual liquidity determinants, such as volatility, volume, and price, common influences remain significant and material. Recognizing the existence of commonality is a key to uncovering some suggestive evidence that inventory risks and asymmetric information both affect intertemporal changes in liquidity.
Kaplan and Zingales [Quart. J. Econ. 112 (1997) 169] and Clearly [J. Finance 54 (2) (1999) 673] diverge from the large literature on investment–cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms. We examine if this result can be explained by the fact that when firms are in sufficiently bad shape (incurring cash losses), investment cannot respond to cash flow. We find that while Cleary's results can be explained by such negative cash flow observations, the Kaplan–Zingales results are driven more by a few influential observations in a small sample. We also record a decline in investment–cash flow sensitivity over the 1977–1996 period, particularly for the most constrained firms.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
I compare the return surrounding a sell-side analyst's initiation of coverage to the return surrounding a recommendation by an analyst who already covers the stock. The market responds more positively to analysts' initiations than to other recommendations. The incremental price impact of an initiation is 1.02% greater than the reaction to a recommendation by an analyst who already covers the stock. I examine whether the hypothesis that analyst coverage increases liquidity explains this incremental return. I find that liquidity improves after initiations, but that one must extend the liquidity hypothesis in order to fully explain the incremental price impact. Liquidity gains subsequent to analyst initiation depend on the analyst's recommendation. The more positive the initial recommendation, the greater the subsequent liquidity improvement. I also find that the initiation abnormal return correlates with the subsequent improvements in liquidity. Corporations should encourage analyst coverage to capture this liquidity benefit.
This paper examines the major determinants of the number of analysts following a firm. A simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm's analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm. Almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition.
This paper examines the degree to which cash flow availability influences firm investment in six OECD countries. In particular, we are interested in the extent to which the reliance on internal funds is affected by firm size, since there is general agreement that smaller firms have less access to external capital markets and, thus, should be more affected by the availability of internal funds. Earlier work has concluded that the documented positive relationship between cash flow and investment is evidence of the existence of financial constraints. We first examine all firms, regardless of size, in each country, and we find that the amount of corporate investment is affected by internal resources in all six countries; that is, internal financing affects firm investment. We then repeat the analysis segmenting the sample using three measures of firm size. Contrary to our a priori expectations, we find that the cash flow-investment sensitivity is generally highest in the large firm size group and smallest in the small firm size group. We deduce that the explanations for these findings are grounded in managerial agency considerations, and in the greater flexibility enjoyed by large firms in timing their investments. Thus, we conclude that the degree of sensitivity of a firm's investments to its cash flows cannot be interpreted as an accurate measure of its access to capital markets (as do Kaplan, S., Zingales, L., 1997. The Quarterly Journal of Economics 169–215), since small firms are known to have less access to external markets.
Financial economists seem to believe that takeovers are partly motivated by the desire to improve poorly performing firms. However, prior empirical evidence in support of this inefficient management hypothesis is rather weak. We provide a detailed re-examination of this hypothesis in a large scale empirical study. We find little evidence that target firms were performing poorly before acquisition, using either operating or stock returns. This result holds both for the sample as a whole and for subsamples of takeovers that are more likely to be disciplinary. We conclude that the conventional view that targets perform poorly is not supported by the data.
Using a large sample of bank loans issued to U.S. firms between 1990 and 2004, we find that lower takeover defenses (as proxied by the lower G-index of Gompers, Ishii, and Metrick 2003) significantly increase the cost of loans for a firm. Firms with lowest takeover defense (democracy) pay a 25% higher spread on their bank loans as compared with firms with the highest takeover defense (dictatorship), after controlling for various firm and loan characteristics. Further investigations indicate that banks charge a higher loan spread to firms with higher takeover vulnerability mainly because of their concern about a substantial increase in financial risk after the takeover. Our results have important implications for understanding the link between a firm's governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
This paper examines the familiar argument that takeover pressure can be damaging because i t leads managers to sacrifice long-term interests in order to boost c urrent profits. If stockholders are imperfectly informed, temporarily low earnings may cause the stock to become undervalued, increasing t he likelihood of a takeover at an unfavorable price; hence the manage rial concern with current bottom line. The magnitude of the problem d epends on a variety of factors, including the attitudes and beliefs o f shareholders, the extent to which corporate raiders have inside inf ormation, and the degree to which managers are concerned with retaini ng control of their firms. Copyright 1988 by University of Chicago Press.
Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow. Paralleling these findings is the disappointing performance of the q theory of investment: even though marginal q should summarize the effects of all factors relevant to the investment decision, cash flow still matters. We examine whether this failure is due to error in measuring marginal q. Using measurement errorconsistent generalized method of moments estimators, we find that most of the stylized facts produced by investment-q cash flow regressions are artifacts of measurement error. Cash flow does not matter, even for financially constrained firms, and despite its simple structure, q theory has good explanatory power once purged of measurement error.
This article provides evidence linking corporate governance mechanisms to higher bond ratings and lower bond yields. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. We find firms that have greater institutional ownership and stronger outside control of the board enjoy lower bond yields and higher ratings on their new bond issues. However, concentrated institutional ownership has an adverse effect on yields and ratings. These results are robust to a specification that controls for institutional ownership being influenced by bond yields.
Shareholder rights vary across firms. Using the incidence of 24 governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
This paper analyzes institutional investors' demand for stock characteristics and the implications of this demand for stock
prices and returns. We find that “large” institutional investors nearly doubled their share of the stock market from 1980
to 1996. Overall, this compositional shift tends to increase demand for the stock of large companies and decrease demand for
the stock of small companies. The compositional shift can, by itself, account for a nearly 50 percent increase in the price
oflarge-company stock relative to small-company stock and can explain part of the disappearance of the historical small-company
stock premium.
No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing
the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find
that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more
financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results
(and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more
financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.
Announcements of successful leveraged buyouts (LBOs) during January 1985 to April 1989 caused a significantly negative return
on outstanding publicly traded nonconvertible bonds. Yet the average risk-adjusted debt holder losses are less than 7 percent
of the average risk-adjusted equity holder gains. Bond losses are related to the pre-LBO rating, but only weakly to equity
holder gains. We demonstrate that trader-quoted data from a major investment bank offers conclusions about the effects of
LBOs on debt holders different from those drawn from commonly used matrix and exchange-based data (such as Standard & Poor’s
Bond Guide data). This has important implications for event studies involving debt instruments.
Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer "greener pastures." Copyright 2003, Oxford University Press.
This paper describes and considers explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. We conclude by considering whether these changes and the movement toward shareholder value are likely to be permanent.
Assessing the price evolution of houses on the basis of average sales prices, as is current practice in Belgium, might be misleading due to changing characteristics of the houses sold in the periods observed. A hedonic index which takes into account changes in characteristics is more appropriate. We use the budget surveys of the Belgian Statistical Institute to illustrate how this also applies for Belgium. The estimated hedonic price index for house sales on the secondary market is practically always below the index based on average sales values for the period considered. This demonstrates the need to collect more extensive data on the characteristics of the dwellings sold in Belgium.
This paper presents evidence on systematic changes in the pricing and financial structure of 124 large management buyouts completed between 1980 and 1989. We find that over tine (1) prices increased relative to current cash flows with no accompanying decrease in risk or increase in projected future cash flows; (2) required bank principal repayments accelerated, leading to sharply lower ratios of cash flow to total debt obligations; (3) private subordinated debt was replaced by public debt while the use of strip-financing techniques declined; and (4) management teams invested a smaller fraction of their net worth in post-buyout equity. These patterns of buyout prices and structures suggest that based on ex ante data, one could have expected lower returns and more frequent financial distress in later buyouts. Preliminary post-buyout evidence is consistent with this interpretation.
Matching university places to students is not as clear cut or as straightforward as it ought to be. By investigating the matching algorithm used by the German central clearinghouse for university admissions in medicine and related subjects, we show that a procedure designed to give an advantage to students with excellent school grades actually harms them. The reason is that the three-step process employed by the clearinghouse is a complicated mechanism in which many students fail to grasp the strategic aspects involved. The mechanism is based on quotas and consists of three procedures that are administered sequentially, one for each quota. Using the complete data set of the central clearinghouse, we show that the matching can be improved for around 20% of the excellent students while making a relatively small percentage of all other students worse off.
We model a firm's demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm's propensity to save cash out of cash flows (the "cash flow sensitivity of cash"). We hypothesize that constrained firms should have a positive cash flow sensitivity of cash, while unconstrained firms' cash savings should not be systematically related to cash flows. We empirically estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory. Copyright 2004 by The American Finance Association.
This paper describes and considers explanations for changes in corporate governance and merger activity in the United States since 1980. Corporate governance in the 1980s was dominated by intense merger activity distinguished by the prevalence of leveraged buyouts (LBOs) and hostility. After a brief decline in the early 1990s, substantial merger activity resumed in the second half of the decade, while LBOs and hostility did not. Instead, internal corporate governance mechanisms appear to have played a larger role in the 1990s. We conclude by considering whether these changes and the movement toward shareholder value are likely to be permanent.
This paper reviews much of the scientific literature on the market for corporate control. The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose. The gains created by corporate takeovers do not appear to come from the creation of market power. With the exception of actions that exclude potential bidders, it is difficult to find managerial actions related to corporate control that harm shareholders. Finally, we argue the market for corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.
We investigate the role of information in affecting a firm's cost of capital. We show that differences in the composition of information between public and private information affect the cost of capital, with investors demanding a higher return to hold stocks with greater private information. This higher return arises because informed investors are better able to shift their portfolio to incorporate new information, and uninformed investors are thus disadvantaged. In equilibrium, the quantity and quality of information affect asset prices. We show firms can influence their cost of capital by choosing features like accounting treatments, analyst coverage, and market microstructure. Copyright 2004 by The American Finance Association.
This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. Copyright 1997 by American Finance Association.
Over the past decade, a number of researchers have extended conventional models of business fixed investment to incorporate a role for "financial constraints" in determining investment. This paper reviews developments and challenges in this empirical research, and uses advances in models of information and incentive problems to motivate those developments and challenges. First, I describe analytical underpinnings of models of capital-market imperfections in the investment process, and illustrate the principal testable implications of those models. Second, I motivate tests and describe and critique existing empirical studies. Third, the review considers applications of the underlying models to a range of investment activities, including inventory investment, R&D, employment demand, pricing by imperfectly competitive firms, business formation and survival, and risk management. Fourth, I discuss implications of this research program for analysis of effects of investment of monetary policy and tax policy. Finally, I examine some potentially fruitful avenues for future research.