The Library
Firms' investment under financial constraints: a Euro area investigation
Tools
Kozhan, Roman and Pál, Rozália (2008) Firms' investment under financial constraints: a Euro area investigation. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.08-).
|
PDF
WRAP_Kozhan_fwp08-07.pdf - Requires a PDF viewer. Download (612Kb) |
Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
Abstract
In this paper we describe a 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 obtained 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 contrasting findings in the financial constraints literature.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
---|---|---|---|---|---|
Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
||||
Library of Congress Subject Headings (LCSH): | Investments -- Mathematical models, Corporations -- Finance, Saving and investment -- Mathematical models, Cash flow, Theory of constraints (Management) | ||||
Series Name: | Working papers (Warwick Business School. Financial Econometrics Research Centre) | ||||
Publisher: | Warwick Business School, Financial Econometrics Research Centre | ||||
Place of Publication: | Coventry | ||||
Official Date: | 2008 | ||||
Dates: |
|
||||
Number: | No.08- | ||||
Number of Pages: | 39 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) |
Request changes or add full text files to a record
Repository staff actions (login required)
View Item |