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Corporate Investment and Financing Constraints: Connections with Cash Management

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  • W.A. Bruinshoofd

Abstract

The empirical application of the financing constraints paradigm supports the joint hypothesis that con-strained firms can be identified and display a stronger sensitivity of investment to cash flow. This paradigm is increasingly criticized, because some proxy variables used to identify constrained firms deliver contradictory results regarding this sensitivity. In addition, some of the firms that display a strong sensitivity have internal funds seemingly in abundance. In this paper, I propose to take a closer look at what constitutes a constrained firm. I do so by considering firms' responses in terms of cash management to the possibility of financing constraints. A fertile area of empirical research addresses the determina-tion of corporate cash holdings and finds that firms specify cash targets partially for circumventing the brunt of future financing constraints. I argue that knowledge of such targets allows for a more precise identification of which firms face financing constraints, because it allows us to measure the amount of 'free cash' that firms have at their disposal.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 734.

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Date of creation: 2003
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Handle: RePEc:dnb:wormem:734

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Keywords: Corporate investment; financing constraints; corporate cash;

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Cited by:
  1. Christopher F. Baum & Mustafa Caglayan & Andreas Stephan & Oleksandr Talavera, 2006. "Uncertainty Determinants of Corporate Liquidity," Discussion Papers of DIW Berlin 633, DIW Berlin, German Institute for Economic Research.
  2. Agustinus Prasetyantoko, 2006. "Financing Constraint and Firm Investment Following a Financial Crisis in Indonesia," Post-Print halshs-00133964, HAL.
  3. Agustinus, Prasetyantoko, 2007. "Foreign Ownership and Firm Financing Constraint in Indonesia," MPRA Paper 6500, University Library of Munich, Germany.
  4. Allard Bruinshoofd & Leo de Haan, 2005. "Financing the New Economy: Are ICT Firms Really That Different?," DNB Working Papers 077, Netherlands Central Bank, Research Department.

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