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Investment Strategy, Dividend Policy and Financial Constraints of the Firm

Author

Listed:
  • Chau-Chen Yang

    (National Taiwan University, R.O.C.)

  • Chung-Jiun Lin

    (National Taiwan University, R.O.C.)

  • Yi-Chen Lu

    (Avanti Corporation, R.O.C.)

Abstract

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

Suggested Citation

  • Chau-Chen Yang & Chung-Jiun Lin & Yi-Chen Lu, 2000. "Investment Strategy, Dividend Policy and Financial Constraints of the Firm," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 235-267.
    • Handle: RePEc:wsi:rpbfmp:v:03:y:2000:i:02:n:s0219091500000121
    DOI: 10.1142/S0219091500000121
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    Citations

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    Cited by:

    1. Chung-Hua Shen & Chih-Yung Lin, 2016. "Political connections, financial constraints, and corporate investment," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 343-368, August.
    2. Xin Che & Kathleen P. Fuller, 2020. "What does the timing of dividend reductions signal?," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1035-1061, October.
    3. Tao Shen, 2017. "Credit spreads and investment opportunities," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 117-152, January.
    4. Subramanian Rama Iyer & Harry Feng & Ramesh P. Rao, 2017. "Payout flexibility and capital expenditure," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 633-659, October.
    5. Mathew Abraham & James Lau & Alastair Marsden, 2019. "Underwriting of Australian Dividend Reinvestment Plans," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-26, September.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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