Corporate Investment and Financing Constraints: Connections with Cash Management

The empirical application of the financing constraints paradigm supports the joint hypothesis that con-strained firms can be identified and display a stronger sensitivity of investment to cash flow. This paradigm is increasingly criticized, because some proxy variables used to identify constrained firms deliver contradictory results regarding this sensitivity. In addition, some of the firms that display a strong sensitivity have internal funds seemingly in abundance. In this paper, I propose to take a closer look at what constitutes a constrained firm. I do so by considering firms' responses in terms of cash management to the possibility of financing constraints. A fertile area of empirical research addresses the determina-tion of corporate cash holdings and finds that firms specify cash targets partially for circumventing the brunt of future financing constraints. I argue that knowledge of such targets allows for a more precise identification of which firms face financing constraints, because it allows us to measure the amount of 'free cash' that firms have at their disposal.Corporate investment, financing constraints, corporate cash

Investment and Financing Decisions when Liquidation is Costly

In this paper we investigate how expected liquidation costs affect a firm's investment and financing decisions. We hypothesise that comovement of firm and industry sales measures such costs, which create a premium on external finance and make investment more sensitive to the availability of internal funds. Supportive evidence for this conjecture is obtained from the investment behaviour of a sample of 206 large Dutch manufacturing firms observed during the period 1983-1996. We also demonstrate that our measure of expected liquidation costs does not convey the same information that other proxies for the premium on external finance - like leverage, retention practice or firm size - already contain.Investment policy; financing policy; liquidation cost; sales comovement