Financing Constraints and Corporate Investment

Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the "cost of capital" or "q"). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a "financing hierarchy," in which internal finance has important cost advantages over external finance. We build on recent research concerning imperfections in markets for equity and debt. This work suggests that some firms do not have sufficient access to external capital markets to enable them to respond to changes in the cost of capital, asset prices, or tax-based investment incentives. To the extent that firms are constrained in their ability to raise funds externally, investment spending may be sensitive to the availability of internal finance. That is, investment may display "excess sensitivity" to movements in cash flow. In this paper, we work within the q theory of investment, and examine the importance of a financing hierarchy created by capital-market imperfections. Using panel data on individual manufacturing firms, we compare the investment behavior of rapidly growing firms that exhaust all of their internal finance with that of mature firms paying dividends. We find that q values remain very high for significant periods of time for firms paying no dividends, relative to those for mature firms. We also find that investment is more sensitive to cash flow for the group of firms that our model implies is most likely to face external finance constraints. These results are consistent with the augmented model we propose, which takes into account different financing regimes for different groups of firms. Some extensions and implications for public policy are discussed at the end.

Inventory Investment, Internal-Finance Fluctuation, and the Business Cycle

macroeconomics, inventory investment, internal-finance fluctuation, business cycle

Financing Constraints and Corporate Investment: Response to Kaplan and Zingales

Kaplan and Zingales (1995, hereafter KZ) criticize Fazzari, Hubbard and Petersen (1988, hereafter FHP) and much ensuing research that uses cross-sectional differences in firm behavior to test for financing constraints on investment. This reply identifies flaws in the KZ analysis. The questions KZ raise have been considered extensively and rigorously in the literature (most of which is not addressed in KZ), with results broadly similar to those of FHP. We also challenge both of KZ's main results. First, their finding that most of the FHP firms are not financially constrained relies on an inappropriate operational definition of what it means to be constrained. Their definition ignores the incentives for firms that operate in imperfect capital markets to accumulate stocks of cash or maintain unused debt capacity to offset partially shocks to the flow of internal finance. Second, the KZ regression results (lower sensitivity of investment to cash flow for firms classified as constrained than for those classified as unconstrained) are uninformative. Their classification approach relies on possibly self- serving managerial statements that may present a distorted picture of firm's availability of finance. It also employs misleading criteria to make unrealistically fine distinctions in the degree of financing constraints, and emphasizes financial distress rather than financing constraints. Finally, econometric problems affect the interpretation of the KZ regressions. We conclude that the KZ findings do not contradict the interpretation of the empirical results in FHP and subsequent research.

Financing Constraints and Corporate Investment

macroeconomics, Financing Constraints, Corporate Investment

License prices for financially constrained firms

It is often alleged that high auction prices inhibit service deployment. We investigate this claim under the extreme case of financially constrained bidders. If demand is just slightly elastic, auctions maximize consumer surplus if consumer surplus is a convex function of quantity (a common assumption), or if consumer surplus is concave and the proportion of expenditure spent on deployment is greater than one over the elasticity of demand. The latter condition appears to be true for most of the large telecom auctions in the US and Europe. Thus, even if high auction prices inhibit service deployment, auctions appear to be optimal from the consumers’ point of view

A stochastic frontier approach to modelling financial constraints in firms:an application to India

We propose the use of stochastic frontier approach to modelling financial constraints of firms. The main advantage of the stochastic frontier approach over the stylised approaches that use pooled OLS or fixed effects panel regression models is that we can not only decide whether or not the average firm is financially constrained, but also estimate a measure of the degree of the constraint for each firm and for each time period, and also the marginal impact of firm characteristics on this measure. We then apply the stochastic frontier approach to a panel of Indian manufacturing firms, for the 1997–2006 period. In our application, we highlight and discuss the aforementioned advantages, while also demonstrating that the stochastic frontier approach generates regression estimates that are consistent with the stylised intuition found in the literature on financial constraint and the wider literature on the Indian credit/capital market

The effects of financialisation and financial development on investment: Evidence from firm-level data in Europe

In this paper we estimate the effects of financialization on physical investment in selected western European countries using panel data based on the balance-sheets of publicly listed non-financial companies (NFCs) supplied by Worldscope for the period 1995-2015. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets by the NFCs. This finding is robust for both the pool of all Western European firms and single country estimations. The negative impacts of financial incomes are non-linear with respect to the companies’ size: financial incomes crowd-out investment in large companies, and have a positive effect on the investment of only small, relatively more credit-constrained companies. Moreover, we find that a higher degree of financial development is associated with a stronger negative effect of financial incomes on companies’ investment. This finding challenges the common wisdom on ‘finance-growth nexus’. Our findings support the ‘financialization thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity

Gli affreschi provenienti dalle terme romane di Reggio Calabria. Dalla conoscenza al restauro

The frescoes at marine thermae discovered in 1886 during the excavation of the small thermal complex dating between the 1th and 3rd century AD, and located on the seafront of Reggio Calabria, have been collected already collapsed. They are currently part of the permanent exhibition of the National Archaeological Museum of Reggio Calabria. This paper illustrates the results of the restoration intervention, carried out in the form of an educational activity in the context of an agreement signed between the MarRC and the University of Calabria, and the results of the diagnostic investigations carried out by the IPCF-CNR of Messina and the STEBICEF department of the University of Palermo

Gender Differences in Russian Colour Naming

In the present study we explored Russian colour naming in a web-based psycholinguistic experiment (http://www.colournaming.com). Colour singletons representing the Munsell Color Solid (N=600 in total) were presented on a computer monitor and named using an unconstrained colour-naming method. Respondents were Russian speakers (N=713). For gender-split equal-size samples (NF=333, NM=333) we estimated and compared (i) location of centroids of 12 Russian basic colour terms (BCTs); (ii) the number of words in colour descriptors; (iii) occurrences of BCTs most frequent non-BCTs. We found a close correspondence between females’ and males’ BCT centroids. Among individual BCTs, the highest inter-gender agreement was for seryj ‘grey’ and goluboj ‘light blue’, while the lowest was for sinij ‘dark blue’ and krasnyj ‘red’. Females revealed a significantly richer repertory of distinct colour descriptors, with great variety of monolexemic non-BCTs and “fancy” colour names; in comparison, males offered relatively more BCTs or their compounds. Along with these measures, we gauged denotata of most frequent CTs, reflected by linguistic segmentation of colour space, by employing a synthetic observer trained by gender-specific responses. This psycholinguistic representation revealed females’ more refined linguistic segmentation, compared to males, with higher linguistic density predominantly along the redgreen axis of colour space