Effects of financial constraints on corporate policies in Australia

Chang, Xin; Tan, Tek Jun; Wong, George; Zhang, Hong Feng

doi:10.1111/j.1467-629x.2007.00200.x

Cited by 29 publications

(47 citation statements)

References 27 publications

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“…For instance, Kaplan and Zingales (1997;, who extensively challenged and questioned the validity of the measure of financial constraints and the positive relationship between investment and cash flow used by Fazzari et al (1988), observed that least constrained firms displayed a higher sensitivity of cash flow to investment than more financially constrained firms. This has been supported in other studies (see Chang, Tan, Wong & Zhang, 2007;Cleary, 1999;Erickson & Whited, 2000). The contradictory conclusions in empirical studies have been attributed to the lack of a precise proxy for financial constraints by Clearly, Povel and Raith (2007), whose research showed a U-shaped (nonmonotonic) relationship between investment and cash flow due to the interaction between the cost and revenue effect of investment.…”

Section: Literature Reviewsupporting

confidence: 60%

The source of investment cash flow sensitivity in manufacturing firms: is it asymmetric information or agency costs?

Makina

Wale

2016

S. Afr. j. econ. manag. sci.

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In the literature, positive investment cash flow sensitivity is attributed to either asymmetric information induced financing constraints or the agency costs of free cash flow. Using data from a sample of 68 manufacturing firms listed on the South African JSE, this paper contributes to the literature by investigating the source of investment cash flow sensitivity. We have found that asymmetric information explains the positive investment cash flow sensitivity better than agency costs. Furthermore, asymmetric information has been observed to be more pronounced in low-dividend-paying firms and small firms. Despite South Africa's having a developed financial system by international standards, small firms are seen to be financially constrained. We attribute the absence of investment cash flow sensitivity due to agency costs to good corporate governance of South African listed firms. Thus the paper provides further evidence in support of the proposition in the literature that the source of investment cash flow sensitivity may depend on the institutional setting of a country, such as its corporate governance.

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Section: Literature Reviewsupporting

confidence: 60%

The source of investment cash flow sensitivity in manufacturing firms: is it asymmetric information or agency costs?

Makina

Wale

2016

S. Afr. j. econ. manag. sci.

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“…Likewise, using a sample of listed Australian companies, Chang et al . () show that financial constraints in fact reduce the sensitivity of investments to internal cash flows while Mills et al . () find exactly the opposite result…”

Section: Introductionmentioning

confidence: 99%

Corporate governance and the sensitivity of investments to cash flows

Bhabra

Kaur

Ahn

2016

Accounting & Finance

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We find very strong and consistent evidence that investments in StrongGovernance firms (managers not entrenched) are strongly sensitive to availability of internal cash flows while such sensitivity is not different from zero for Weak-Governance firms (entrenched management). We interpret this as evidence in support of Kaplan and Zingales' (1997) contention that sensitivity of investments to cash flows is not an adequate measure of financing constraints. More importantly, our findings are consistent with Kaplan and Zingales' conjecture that the observed sensitivity of investments to cash flows in firms that do not face financing constraints may be driven by excessive risk aversion of managers.

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“…9 9 However, this interpretation of the sensitivity of investment to cash flow has been questioned by Kaplan and Zingales (1997), Cleary (1999, 2006) and Chang et al . (2007), among others.…”

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confidence: 99%

Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain

Pindado

Torre

2009

Accounting & Finance

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This paper investigates how ownership affects the investment-cash flow sensitivity by taking into account the non-linearities of ownership with respect to firm value, and using a free cash flow index and a criterion for financial constraints to disentangle underinvestment and overinvestment. Interesting results are provided by estimating using the Generalized Method of Moments to eliminate the endogeneity problem. The alignment of interests between owners and managers and the monitoring by concentrated ownership both alleviate the sensitivity of investment to cash flow both in underinvestor and overinvestor firms. However, in the presence of controlling owners, underinvestment and overinvestment are exacerbated. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

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Effects of financial constraints on corporate policies in Australia

Cited by 29 publications

References 27 publications

The source of investment cash flow sensitivity in manufacturing firms: is it asymmetric information or agency costs?

The source of investment cash flow sensitivity in manufacturing firms: is it asymmetric information or agency costs?

Corporate governance and the sensitivity of investments to cash flows

Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain

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