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Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales

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  • Hovakimian, Gayane
  • Titman, Sheridan

Abstract

We examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales. Asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities. The cross-sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation. We find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0034
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 2 (March)
Pages: 357-374

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:2:p:357-374

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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