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Financial Constraints, Liquidity Management and Investment

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  • Timothy J. Riddiough
  • Zhonghua Wu

Abstract

Investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained and empirical estimates of Tobin's "q" provide reliable measures of investment opportunity. Across the entire sector, we document substantial realized investment as well as high investment sensitivity to "q". Investment is also sensitive to measures of financial market frictions, suggesting that constraints on retention of cash flow distort investment decisions. Liquidity is managed through dividend policy and access to short-term bank finance, in which bank lines of credit smooth variation in available cash flow and accelerate investment. Using the Kaplan-Zingales method for measuring the degree of financial constraint, we identify substantial differences between investment and liquidity management policies of firms, in which more (less) financially constrained firms in our sample exhibit high (low) investment and liquidity management sensitivity to variables that measure financial market frictions. Copyright (c) 2009 American Real Estate and Urban Economics Association.

Suggested Citation

  • Timothy J. Riddiough & Zhonghua Wu, 2009. "Financial Constraints, Liquidity Management and Investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(3), pages 447-481.
  • Handle: RePEc:bla:reesec:v:37:y:2009:i:3:p:447-481
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    References listed on IDEAS

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    Cited by:

    1. Woei-Chyuan Wong & Seow-Eng Ong & Joseph Ooi, 2013. "Sponsor Backing in Asian REIT IPOs," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 299-320, February.
    2. S. McKay Price & Michael J. Seiler & Jiancheng Shen, 2017. "Do Investors Infer Vocal Cues from CEOs During Quarterly REIT Conference Calls?," The Journal of Real Estate Finance and Economics, Springer, vol. 54(4), pages 515-557, May.
    3. repec:bla:abacus:v:53:y:2017:i:3:p:319-348 is not listed on IDEAS
    4. Erik Devos & Andrew Spieler & Desmond Tsang, 2014. "Elective Stock Dividends and REITs: Evidence from the Financial Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(1), pages 33-70, March.
    5. Chinmoy Ghosh & Le Sun, 2014. "Agency Cost, Dividend Policy and Growth: The Special Case of REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 660-708, May.
    6. repec:bla:abacus:v:53:y:2017:i:3:p:371-394 is not listed on IDEAS
    7. Hohenstatt, Ralf & Steininger, Bertram, 2011. "The rat race of capital structure research for REITs and REOCs: Two spotlights on leverage," ZEW Discussion Papers 11-077, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Heng An & William Hardin & Zhonghua Wu, 2012. "Information Asymmetry and Corporate Liquidity Management: Evidence from Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 678-704, October.
    9. Piet Eichholtz & Erkan Yönder, 2015. "CEO Overconfidence, REIT Investment Activity and Performance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 139-162, March.

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