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Financial constraints and the cash flow sensitivities of external financing: Evidence from Korea

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  • Park, Jin

Abstract

According to pecking order theory, the relationship between internal and external financing is negative because of the cost difference in raising funds. However, what if the role of debt and equity issuance differ in response to the cash flow? To address this, I examine 10,886 firm-year observations in Korea and find several intriguing findings. (1) Debt issuance is negatively related to cash flow as expected, but not for equity issuance. (2) The results are due to firms’ intention to issue new equity when their cash flow is positive. (3) Substitution between internal funds and debt is mostly driven by paying off short-term debt. (4) A negative relationship between internal and external financing (debt issuance) exists in the firm-years of positive and increasing cash flow. (5) Regarding financial constraints, pecking order theory is better demonstrated by financially unconstrained firms.

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  • Park, Jin, 2019. "Financial constraints and the cash flow sensitivities of external financing: Evidence from Korea," Research in International Business and Finance, Elsevier, vol. 49(C), pages 241-250.
    • Handle: RePEc:eee:riibaf:v:49:y:2019:i:c:p:241-250
    DOI: 10.1016/j.ribaf.2019.03.007
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    More about this item

    Keywords

    Cash flow; External financing; Debt issuance; Equity issuance; Financial constraints;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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