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

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Gayane Hovakimian
Sheridan Titman

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Abstract

This paper examines the importance of financial constraints for firm investment expenditures by looking at the relationship between investment expenditures and proceeds from voluntary asset sales in financially healthy US manufacturing companies. Specifically, we examine whether asset sales have a greater influence on investment expenditures for firms that are likely to be financially constrained. Asset sales may provide a cleaner indicator of liquidity than cash flow since it appears not to be positively correlated with future investment opportunities. The cross-sectional differences in firm investment expenditures are examined using an endogenous switching regression model with unknown sample separation, which does not require an a priori classification of firms or knowledge of their financial constraints. We find that after controlling for investment opportunities and cash generated from operations, cash obtained from asset sales is a significant determinant of corporate investment. Moreover, the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be associated with characteristics associated with financial constraints.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9432.

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Date of creation: Jan 2003
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Handle: RePEc:nbr:nberwo:9432

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Find related papers by JEL classification:
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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References listed on IDEAS
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.:
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    Other versions:
  4. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn. [Downloadable!] (restricted)
  5. Asquith, Paul & Gertner, Robert & Scharfstein, David, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 625-58, August. [Downloadable!] (restricted)
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  6. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
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  11. Brown, David T. & James, Christopher M. & Mooradian, Robert M., 1994. "Asset sales by financially distressed firms," Journal of Corporate Finance, Elsevier, vol. 1(2), pages 233-257, August. [Downloadable!] (restricted)
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  15. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
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  23. Michael Devereux & Fabio Schiantarelli, 1989. "Investment, Finacial Factors and Cash Flow: Evidence From UK Panel Data," NBER Working Papers 3116, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Oliner, Stephen D & Rudebusch, Glenn D, 1992. "Sources of the Financing Hierarchy for Business Investment," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 643-54, November. [Downloadable!] (restricted)
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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. Allard Bruinshoofd, 2003. "Corporate Investment and Financing Constraints: Connections with Cash management," DNB Staff Reports (discontinued) 110, Netherlands Central Bank. [Downloadable!]
    Other versions:
  2. Marialuz Moreno Badia & Veerle Slootmaekers, 2009. "The Missing Link Between Financial Constraints and Productivity," IMF Working Papers 09/72, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Missaka Warusawitharana, 2007. "Corporate asset purchases and sales: theory and evidence," Finance and Economics Discussion Series 2007-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Alfonsina Iona & Leone Leonida & Aydin Ozkan, . "Determinants of Financial Conservatism: Evidence from Low-Leverage and Cash-Rich UK Firms," Discussion Papers 04/01, Department of Economics, University of York. [Downloadable!]
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