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Corporate efficiency, credit status and investment

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  • Manzur Quader
  • Karl Taylor

Abstract

This paper considers the relationship between financial frictions and investment. In an effort to clarify the role of cash flow in examining the impact of capital market imperfections, endogenous switching regression models are estimated for a panel of 1122 UK firms listed on the London Stock Exchange over the period of 1981–2009. Not only is the financial regime which the firm faces endogenous, we also allow the regime to change over time via modeling efficiency using stochastic frontier analysis. The results reveal that a firm's constrained credit status changes with the improvement of its efficiency. Furthermore, the analysis reveals that financially constrained firm's investment is comparatively more sensitive to its cash flow. Moreover, this sensitivity is statistically significant and is negatively related with corporate efficiency.

Suggested Citation

  • Manzur Quader & Karl Taylor, 2018. "Corporate efficiency, credit status and investment," The European Journal of Finance, Taylor & Francis Journals, vol. 24(6), pages 439-457, April.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:6:p:439-457
    DOI: 10.1080/1351847X.2017.1312475
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    Cited by:

    1. Amal Jose & Saumitra Bhaduri, 2025. "What’s in the Text?—A Text-Based Financial Constraint Index for Indian Manufacturing Firms," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 23(1), pages 285-314, March.
    2. Aissata Boubacar Moumouni, 2020. "Investment Sensitivity to Inter-enterprises Payment Deadlines," AMSE Working Papers 1938, Aix-Marseille School of Economics, France.
    3. Lijuan Xiao & Min Bai & Yafeng Qin & Lingyun Xiong & Lijuan Yang, 2021. "Financial Slack and Inefficient Investment Decisions in China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 920-941, June.
    4. Dinithi Ranasinghe, 2021. "Managerial entrenchment, financial constraints, and investment choice in unlisted firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 258-270, January.
    5. Ömer Tuğsal Doruk & Bahadır Ergün, 2023. "Friend or foe? The link between agency cost and financialization in Turkey," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1689-1705, April.
    6. Aissata Boubacar Moumouni, 2020. "Investment Sensitivity to Inter-enterprises Payment Deadlines," Working Papers hal-02889436, HAL.
    7. Anagnostopoulou, Seraina C. & Avgoustaki, Argyro, 2023. "The impact of human resource practices on corporate investment efficiency," International Review of Financial Analysis, Elsevier, vol. 87(C).
    8. Syed Manzur Quader, 2017. "Differential effect of liquidity constraints on firm growth," Review of Financial Economics, John Wiley & Sons, vol. 32(1), pages 20-29, January.
    9. Thu A. T. Pham, 2018. "Industry Concentration, Firm Efficiency and Average Stock Returns: Evidence from Australia," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(3), pages 221-247, September.
    10. Quader, Syed Manzur, 2023. "The interplay between uncertainty, managerial decision making, and firm value: Evidence from Bangladesh," Journal of Economics and Business, Elsevier, vol. 123(C).

    More about this item

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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