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Corporate Efficiency, Credit Status and Investment

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  • Quader, Manzur

    () (Chittagong Independent University)

  • Taylor, Karl

    () (University of Sheffield)

Abstract

Using a panel of 1122 UK firms listed on the London Stock Exchange over the period of 1981 to 2009, endogenous switching regression models (SRM) incorporating a predicted corporate efficiency index are estimated in this paper in an effort to clarify the role of cash flow in examining the impact of capital-market imperfections. It is revealed that a firm's constrained credit status changes with the improvement of its efficiency. The results further reveal that financially constrained firm's investment is comparatively more sensitive to cash flow, but this sensitivity is negatively and significantly related with corporate efficiency. These results point to the fact that high investment sensitivity to cash flow may not be solely driven by measurement error in investment opportunity, but may still be interpreted as a consequence of imperfect substitutability between internal and external financing arising from the capital market imperfections.

Suggested Citation

  • Quader, Manzur & Taylor, Karl, 2014. "Corporate Efficiency, Credit Status and Investment," IZA Discussion Papers 8285, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp8285
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    Keywords

    asymmetric information; financial constraints; switching regression;

    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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