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Effects of financial constraints on corporate policies in Australia

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  • Xin Chang
  • Tek Jun Tan
  • George Wong
  • Hongfeng Zhang
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    Abstract

    We jointly study the impact of financial constraints on Australian companies' investment decisions and demand for liquidity. By examining a large sample of Australian firms over the period 1990-2003, we find that financial constraints not only reduce the sensitivity of investment to the availability of internal funds, but also increase the responsiveness of cash holdings to internally generated cash flows. Further analysis shows that the impact of financial constraints varies across different cash flow states; that is, financial constraints have a small effect on corporate investment and cash policies when cash flows are positive. In contrast, the severity of constraints is high in negative cash flow years in which the cost disadvantage of external finance coincides with deteriorating operating performance. Copyright (c) The Authors Journal compilation (c) 2007 AFAANZ.

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    Bibliographic Info

    Article provided by Accounting and Finance Association of Australia and New Zealand in its journal Accounting and Finance.

    Volume (Year): 47 (2007)
    Issue (Month): 1 ()
    Pages: 85-108

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    Handle: RePEc:bla:acctfi:v:47:y:2007:i:1:p:85-108

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    Cited by:
    1. Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
    2. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms' Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, 09.

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