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Corporate Investment and Financing Constraints: Connections with Cash Management

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Author Info
W.A. Bruinshoofd

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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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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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Related research
Keywords: Corporate investment; financing constraints; corporate cash;

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christopher F. Baum & Mustafa Caglayan & Andreas Stephan & Oleksandr Talavera, 2005. "Uncertainty Determinants of Corporate Liquidity," Boston College Working Papers in Economics 634, Boston College Department of Economics, revised 09 Oct 2006. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  3. Agustinus Prasetyantoko, 2006. "Financing Constraint and Firm Investment Following a Financial Crisis in Indonesia," Post-Print halshs-00133964_v1, HAL. [Downloadable!]
  4. Agustinus, Prasetyantoko, 2007. "Foreign Ownership and Firm Financing Constraint in Indonesia," MPRA Paper 6500, University Library of Munich, Germany. [Downloadable!]
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