Financial Constraints, Asset Tangibility, and Corporate Investment

Heitor Almeida · Murillo Campello A

1,570 citations0/0 files storedReview of Financial Studies

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Pledgeable assets support more borrowing, which allows for further investment in pledgeable assets. We use this credit multiplier to identify the impact of financing frictions on corporate investment. The multiplier suggests that investment-cash flow sensitivities should be increasing in the tangibility of firms' assets (a proxy for pledgeability), but only if firms are financially constrained. Our empirical results confirm this theoretical prediction. Our approach is not subject to the Kaplan and Zingales (1997) critique, and sidesteps problems stemming from unobservable variation in investment opportunities. Thus, our results strongly suggest that financing frictions affect investment decisions. , Oxford University Press.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1988Financing Constraints and Corporate Investment 1987Financing Constraints and Corporate Investment 2003Managing with Style: The Effect of Managers on Firm Policies 2004The Cash Flow Sensitivity of Cash 1992Liquidation Values and Debt Capacity: A Market Equilibrium Approach 1993Risk Management: Coordinating Corporate Investment and Financing Policies

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