Financial constraints and the interdependence of corporate ﬁnancial decisions A cross-country study
Keywords: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.
Copyright (c) 2020 Guilherme Kirch, Paulo Renato Terra
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Management Department of the School of Economics, Management and Accounting of the University of São Paulo.
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