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The impact of cross-ownership on the reaction of corporate investment and financing constraints: a panel threshold model

  • Chung-Hua Shen
  • Chien-An Wang
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    This paper studies whether or not investment decisions are financially constrained in a cross-ownership system of Taiwan. Different from the financial structure in the USA, subsidiaries in Taiwan are allowed to buy stocks of the parent companies. Hence, the conventional debt-to-equity ratio is inappropriate to divide firms into high and low-debt firms. Instead, a new threshold variable - the adjusted debt-equity ratio (ADE) - is employed to divide the sample into high-debt firms and low-debt firms. A panel of 115 Taiwan-listed firms for the period 1991-1997 is used. Evidence supports the cash flow hypothesis and ADE has a notable significant influence on the financial constraints.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500218786
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    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 37 (2005)
    Issue (Month): 20 ()
    Pages: 2315-2325

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    Handle: RePEc:taf:applec:v:37:y:2005:i:20:p:2315-2325
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    1. 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.
    2. Robert S. Chirinko & Huntley Schaller, 1993. "Why does liquidity matter in investment equations?," Research Working Paper 93-13, Federal Reserve Bank of Kansas City.
    3. 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.
    4. 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.
    5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
    6. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-84, December.
    7. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
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