CORPORATE FINANCE, FINANCIAL DEVELOPMENT, AND GROWTH

Advances in Financial Economics, 2002

Abstract: There continues to be much interest in the impact of internal funds on the level of corporate investment activity. While some studies provide evidence that investment decisions of firms that are financially constrained are more sensitive to the availability of internal funds than those of less constrained firms, other studies show the opposite, ie investment decisions of the most credit-worthy firms are most sensitive to internal funds availability. This paper tests these opposing propositions for US firms using data for a ...

Policy Research Working Papers, 1999

Page 1. &)Fs /G6 3 POLICY RESEARCH WORKING PAPER 1663 Internal Finance Firms rely on internal finance for capital expenditures and Investment because of managerial considerations instead of Another Look informatior-theoretic considerations. That is, rather ...

European Financial …, 2010

The authors appreciate helpful comments from the seminar participants at the EFMA (2008) annual meeting and at the University of Piraeus. The authors also thank Louis Chan (EFMA discussant), Ozgur Demirtas, Theodore Sougiannis and an anonymous referee for insightful comments and suggestions. The usual disclaimer applies. This is an expanded and updated version of the previously circulated paper: "Accruals, net stock issues and value-growth anomalies: new evidence on their relation''.

Journal of Multinational Financial Management, 2006

A euro area, 2006

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.

Journal of Financial Economics, 1984

This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors.

SSRN Electronic Journal, 2000

2012

Investment is an important economic variable and, therefore, it is important to have an understanding of the factors that determine its evolution over time. One aspect that has been highlighted in recent research is that corporate investment behavior is influenced by the financial structure of firms. In fact, if the hypothesis of imperfect capital markets holds, there is no perfect substitutability between the various sources of funds, which may affect the investment expenses of firms and lead to a situation of underinvestment. In this paper, a brief overview of different explanations for the relationship between financing patterns and investment behavior of firms is presented.

International Review of Finance, 2011

This study conducts tests of the pecking order theory using an international sample with more than 6000 firms over the period from 1995 to 2005. The high correlation between net equity issuances and the financing deficit discredits the static pecking order theory. Rather than analyzing the predictions of the theory, we test its core assumption that information asymmetry is an important determinant of capital structure decisions. Our empirical results support the dynamic pecking order theory and its two testable implications. First, the probability of issuing equity increases with less pronounced firm-level information asymmetry. Second, firms exploit windows of opportunity by making relatively larger equity issuances and build up cash reserves (slack) after declines in firm-level information asymmetry. Firms from common law countries use parts of their proceeds from an equity issuance to redeem debt and to rebalance their capital structure. These findings are consistent with a time-varying adverse selection explanation of firms' financing decisions.

Journal of Banking & Finance, 2008

Models of capital market imperfections predict that information asymmetry increases the sensitivity of a firm's investment expenditures to fluctuations in internal funds by making external capital more costly. Previous empirical tests of the link between investment and financing decisions have relied on indirect measures of the degree to which a firm becomes financially constrained due to market frictions. In contrast, we use more direct measures of informational frictions derived from the market microstructure literature. Consistent with the theoretical prediction, our analysis shows that the scaled investment expenditures of firms with greater informed trade have greater investment-cash flows sensitivity. We also find the relationship between investment-cash flow sensitivity as a function of informed trade is nonmonotonic. Our results are robust to multiple alternative measures of informed trade and liquidity.

Vierteljahrshefte zur Wirtschaftsforschung, 2001

This paper investigates whether investment spending of firms is sensitive to the availability of internal funds. Imperfect capital markets create a hierarchy for the different sources of funds such that investment and financial decisions are not independent. The relation between corporate investment and free cash flow is investigated using the Bond and Meghir (1994a) Euler-equation model for a panel of 240 companies listed on the London Stock Exchange over a 6-year period. This method allows for a direct test of the firstorder condition of an intertemporal maximisation problem. It does not require the use of Tobin's q, which is subject to mis-measurement problems. Apart from past investment levels and generated cash flow, the model also includes a leverage factor which captures potential bankruptcy costs and the tax advantages of debt. More importantly, we investigate whether ownership concentration by class of shareholder creates or mitigates liquidity constraints.

SSRN Electronic Journal

Rather than examining firm-level data on capital structure and asset structure, we connect the financing choice to the characteristics of specific investments. We hand-collect and classify those characteristics. Controlling for a firm's existing assets, capital structure and valuation, we document a strong link between an investment's characteristics and the type of security issued if the investment is externally financed. Investments with more volatile and distant payoffs tend to be equity-financed. Investments in assets that are both tangible and non-unique tend to be debt-financed. The likelihood of debt financing increases with the need for monitoring and convertibles are relatively more common when payoffs are volatile and investment life is uncertain. Factor analysis indicates that the principal dimension determining the form of financing is the R&D-like nature of an investment.

SSRN Electronic Journal, 2016

This paper analyzes the differences in investment and financing decisions of private and public firms by focusing on their use of cash flow. Our tests cover all channels through which a firm can spend its cash flow or compensate for lack of internal funds. Using a large dataset of private and public firms from Western Europe, we create a sample of matching firms to isolate the effects of private and public ownership. Our results show that private and public firms behave significantly different in their investment and financing decisions. Private firms exhibit lower investment-cash flow sensitivities and a stronger link between performance and shareholder distributions. We find that these differences between private and public firms can be accounted for entirely by their use of unexpected cash flow. However, our results can only be observed in countries with a highly developed and liquid stock market and low ownership concentration. We conclude that it is the "dark side" of liquidity that reduces the incentives for shareholders to actively monitor managers and, eventually, leads to inefficient cash flow allocation in public firms.

2009

Management of capital structure is an important part of maximizing the firm value. Financial research has proposed many theories that explain aspects of firm behavior when a firm makes financial decisions that change the firm's capital structure. However, none of the theories fully explain why firms with similar fundamental characteristics make different financing choices. This study focuses on what motivates managers when they are making external financing decisions. It investigated whether the motivation for the decisions about capital structure are driven by market timing or managerial overoptimism. This is done by focusing on equity and debt issues and whether these issues bring the firms closer to or farther away from their optimal capital structure. This study finds that the excess leverage proxy is negatively and significantly related to the one, two, and three year post-financing buy-and-hold abnormal returns even when firm characteristics are controlled. These results are also found when nonissuing matched firms, small firms, and large firms are analyzed. These results are consistent with the Managerial Overoptimism Theory. The results of this study also show that in the first post-financing year firms that issue equity when they are predicted to issue debt significantly out-perform APPROVAL FOR SCHOLARLY DISSEMINATION The author grants to the Prescott Memorial Library of Louisiana Tech University the right to reproduce, by appropriate methods, upon request, any or all portions of this Dissertation. It is understood that "proper request" consists of the agreement, on the part of the requesting party, that said reproduction is for his personal use and that subsequent reproduction will not occur without written approval of the author of this Dissertation. Further, any portions of the Dissertation used in books, papers, and other works must be appropriately referenced to this Dissertation.

American Economic Review, 2010

To address how technological progress in financial intermediation affects the economy, a costly-state verification framework is embedded into the standard growth model. The framework has two novel ingredients. First, firms differ in the risk/return combinations that they offer. Second, the efficacy of monitoring depends upon the amount of resources invested in the activity. A financial theory of firm size results. Undeserving firms are over-financed, deserving ones under-funded. Technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive firms toward productive ones. With continued progress, the economy approaches its first-best equilibrium. (JEL G21, G31, O16, O33, O41)