Financial Constraint, Liquidity Management and Investment
➤ Gửi thông báo lỗi ⚠️ Báo cáo tài liệu vi phạmNội dung chi tiết: Financial Constraint, Liquidity Management and Investment
Financial Constraint, Liquidity Management and Investment
Financial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investment.eduZhonghua Wu School of Business Florida International University wuz@fiu.eduThis Draft: November 2007AbstractInvestment and liquidity management are analyzed in a sector where firms are exogenously cash flow constrained. Across the entire sector, we find high investment sensitivity to both g and Financial Constraint, Liquidity Management and Investmentmeasures of financial market frictions. Liquidity is managed through cash retention (dividend) policy and access to short-term bank finance, in whichFinancial Constraint, Liquidity Management and Investment
bank line of credit smoothes variation in available cash flow and accelerates investment. We show that cash flow constraint is not equivalent to finanFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentariables that measure financial market frictions. Empirical results provide support for debt overhang, free cash flow and asset tangibility as important financial market frictions that influence investment outcomes.■ We thank David T. Brown. Jim Clayton. Morris Davis. Piet Eiccholtz. Erasmo Giambona Financial Constraint, Liquidity Management and Investment. Don Hausch. Francois Ortalo-Magné. Steve Malpezzi. Armin Schwienbacher, James Seward. David Shulman. Ko Wang. Toni Whited and seminar participants aFinancial Constraint, Liquidity Management and Investment
t Baruch College, University of Amsterdam, University of Wisconsin-Madison, and the 2006 ASSA meetings for helpful comments. We gratefully acknowledgeFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentnd Investment1. IntroductionFazzari, Hubbard, and Petersen (1988) convincingly argue that internal versus external sources of finance are imperfect substitutes in the context of funding investment, and hence that financial constraints impede the efficient allocation of resources. Their study has had Financial Constraint, Liquidity Management and Investment wide impact, and has come under intense scrutiny.Critics, beginning with panelists that provided comments and discussion published alongside the origFinancial Constraint, Liquidity Management and Investment
inal Brookings paper, have generally focused on three instrumental issues: i) endogeneity of financial constraint proxies; ii) measurement error in ToFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentestment outcomes. Chirinko (1993) concisely summarizes these concerns by stating, “It is unclear whether significant liquidity and net worth variables are capturing a structural element heretofore missing in the investment equation or are merely reflecting a general misspecification.”Previous studie Financial Constraint, Liquidity Management and Investments have addressed one or two of these instrumental issues at a time, but none have addressed all three in a systematic and comprehensive manner. For exFinancial Constraint, Liquidity Management and Investment
ample, Whited (1992) and Kaplan and Zingales (1997) primarily address the financial constraint issue, while Erickson and Whited (2000) focus on measurFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investment The intent of this study is to address all three issues—endogeneity of financial constraint proxies, measurement error in q, and omitted variables.'channels—simultaneously and comprehensively in order to provide additional perspective on the effects of financial constraint on investment decisions.1 Financial Constraint, Liquidity Management and Investmenthttps://khothuvien.cori!To address endogeneity in the financial constraint proxy and measurement error in q, we analyze a specific sector that provideFinancial Constraint, Liquidity Management and Investment
s an attractive natural economic laboratory: publicly traded firms that own commercial real estate assets in an investment vehicle called a Real EstatFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investment00 percent of GAAP net income to avoid negative tax effects. This implies that the entire sector is constrained in its ability to retain cash, and therefore depends heavily on external finance to fund investment, which mitigates concerns over confounding effects in identifying constrained firms. The Financial Constraint, Liquidity Management and Investmentse firms also have well measured q values, due to the competitive nature of the industry and characteristics of the underlying commercial real estateFinancial Constraint, Liquidity Management and Investment
assets.The third instrumental issue revolves around omitted variables and resource channels. We make two contributions in this regard. First, we recogFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmenthold less internal liquidity when low-cost external sources such as bank lines of credit (L/C) exist. Consequently, firms that might appear to be liquidity constrained may in fact have more than adequate stores of liquidity when external sources are recognized. Second, we specify and estimate a stru Financial Constraint, Liquidity Management and Investmentctural model that accounts for endogeneity in cash flow retention, bank L/C usage, and investment decisions. Cash flow retention and bank L/C usage toFinancial Constraint, Liquidity Management and Investment
gether account for a finn’s liquidity management policy as related to investment, where simultaneous consideration allows US to better disentangle cauFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentt covering the years 1990-2003 has been assembled to analyze these issues. Preliminary'- analysis shows that REITs retain less cash flow, have a lower stock of cash, and use more bank L/C than a broad cross-section of other publicly traded firms. In other words, based on these measures, REITs appear Financial Constraint, Liquidity Management and Investment to be financially constrained. We also find that REIT bank L/C usage increases monotonically with investment. This suggests that, in the short run, aFinancial Constraint, Liquidity Management and Investment
nd given their2significant constraints on cash flow retention, bank L/C substitutes for internal cash in funding investment.Full sample structural 3SLFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentank L/C use all significantly affect investment, with coefficient estimates that imply high investment sensitivities. Investment sensitivity to q is such that the elasticity of investment with respect to q is just shy of one, which places it near what standard q-theory would predict. Given the cash Financial Constraint, Liquidity Management and Investmentflow constraints faced by REITs together with the fact that commercial real estate assets are tangible with significant debt capacity, high investmentFinancial Constraint, Liquidity Management and Investment
sensitivity to both retained cash flow and bank L/C use is consistent with effects of asset tangibility (Almeida and Campello (2007)) and incentives Financial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentll sample, firms are seen to invest at a rate of approximately 20 percent per year, which exceeds rates of investment by the broad cross-section of comparison industrial firms. Moreover, most REITs pay well in excess of the minimum dividend payout requirement. This raises the issue of whether these Financial Constraint, Liquidity Management and Investmentcash flow constrained and equity dependent firms are really financially constrained. In other words, why is external finance available and affordableFinancial Constraint, Liquidity Management and Investment
to these firms?We conjecture that limited discretion on cash retention mitigates adverse selection costs associated with raising outside finance. ThisFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentr financial market friction, cash flow constraints and equity dependence are not sufficient conditions for financial constraint.To differentiate between the effects of cash flow constraint and financial constraint on investment and liquidity management, we split the sample based on Kaplan and Zingal Financial Constraint, Liquidity Management and Investmentes’ (1997) methodology for indexing financial constraint. Based on KZ index scores, we find the more constrained sub-sample invests less, generates loFinancial Constraint, Liquidity Management and Investment
wer cash flow and has a lower stock of cash, pays3fewer dividends, employs more leverage, and is less likely (0 maintain relationships with bank lendeFinancial Constraint, Liquidity Management and Investment’Timothy J. Riddiough School of Business University of Wisconsin-Madison triddiough@bus.wisc. Financial Constraint, Liquidity Management and Investmentrained.Simultaneous equation estimation reveals substantial differences between firms that are more versus less financially constrained. Consistent with arguments of Gomes (2001), the less financially constrained firms are responsive to investment signals contained in their stock prices, while the m Financial Constraint, Liquidity Management and Investmentore constrained firms are not. This outcome refines results of Baker. Stein and Wurgler (2003). who do not differentiate equity dependent firms on theFinancial Constraint, Liquidity Management and Investment
basis of financial constraint.Sensitivity of investment and liquidity management to proxies for financial market frictions is generally much higher iGọi ngay
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