Financial constraints and the interdependence of corporate financial decisions A cross-country study


  • Universidade Federal do Rio Grande do Sul
  • Escola de Administração de Empresas de São Paulo da Fundação Getúlio Vargas


Financial constraints, Financial decisions, Cash flow sensitivity


Purpose – This paper aims to examine the interdependence of financial decisions (investment, financing, dividends and cash-holding) under financial constraints.

Design/methodology/approach – The authors specify and estimate a system of simultaneous equations with panel data and firm fixed effects by three-stage least squares in a sample of firms from 62 countries from 1996 to 2010.

Findings – The main findings largely corroborate previous studies regarding the interdependence of financial decisions. The authors also find evidence suggesting that financial constraints have a major impact on firms’ financial decisions. The results also suggest that financial constraints manifest themselves in virtually all firms, indicating that such constraints are a matter of degree and not of kind.

Research limitations/implications – Implications regarding the impact of cash flows on investment and cash-holding decisions are only partially confirmed.

Practical implications – The results are consistent with the hypothesis that financial constraints distort the financial policies of firms. For the purpose of formulating policies that reduce these distortions, the authors emphasize the role of the availability of internal funds and the recoverable fraction of assets in easing financial constraints, thus allowing for greater investment on the part of firms.

Social implications – The results suggest that regulators should promote policies that reduce the dependence of corporate investment on internally generated cash flows.

Originality/value – Unlike previous studies, the authors account for the direct impact endogenous variables could have on each other. In addition, they explore the impact of each country’s particular legal environment on the pledgeability of assets at the company level.


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Research Paper