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Financial Constraints, Asset Tangibility, and Corporate Investment

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Author Info
Heitor Almeida
Murillo Campello
Abstract

Pledgeable assets support more borrowing, which allows for further investment in pledgeable assets. We use this credit multiplier to identify the impact of financing frictions on corporate investment. The multiplier suggests that investment-cash flow sensitivities should be increasing in the tangibility of firms' assets (a proxy for pledgeability), but only if firms are financially constrained. Our empirical results confirm this theoretical prediction. Our approach is not subject to the Kaplan and Zingales (1997) critique, and sidesteps problems stemming from unobservable variation in investment opportunities. Thus, our results strongly suggest that financing frictions affect investment decisions. , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhm019
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 20 (2007)
Issue (Month): 5 (200712)
Pages: 1429-1460
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:20:y:2007:i:5:p:1429-1460

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  1. Christopher F Baum & Mustafa Caglayan & Oleksandr Talavera, 2009. "Corporate Liquidity Management and Future Investment Expenditures," Boston College Working Papers in Economics 712, Boston College Department of Economics. [Downloadable!]
  2. Marialuz Moreno Badia & Veerle Slootmaekers, 2009. "The Missing Link Between Financial Constraints and Productivity," IMF Working Papers 09/72, International Monetary Fund. [Downloadable!]
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This page was last updated on 2009-11-28.

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