Firms' investment under financing constraints. An euro area investigation

Arbeitspapier

In this paper we describe a theoretical model of optimal investment of various types of financially constrained firms. We show that the resulting relationship between internal funds and investment is non-monotonic. In particular, the magnitude of the cash flow sensitivity of the investment is lower for firms with credit rationing compared to firms that are able to obtain short-term external financing. The inverse relationship is driven by the leverage multiplier effect. A positive cash flow shock increases the short-term borrowing capacity of the firm, which in turn has a positive effect on investment and firm's growth. Moreover, the leverage multiplier effect is the highest for firms relying on short-term credits and it is lower for firms that are able to obtain long-term financing. Analysing a large euro area data set we find strong empirical support for our theoretical predictions. The results also help to explain some contradictory findings in the financing constraints literature.

Angaben zum Objekt

• ISBN: 9639588776
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: IEHAS Discussion Papers ; No. MT-DP - 2006/6

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Thema: Financing constraints ; growth ; investment ; cash flow sensitivity ; Investition ; Budgetrestriktion ; Cash Flow ; Theorie ; Schätzung ; EU-Staaten

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Pál, Rozália ; Kozhan, Roman
• Ereignis: Veröffentlichung
• (wer): Hungarian Academy of Sciences, Institute of Economics
• (wo): Budapest
• (wann): 2006

Weitere Informationen

• Handle: http://hdl.handle.net/10419/108102
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ