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Corporate Investment and Financing Constraints: Connections with Cash Management

Corporate Investment and Financing Constraints: Connections with Cash Management
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Year:    2006

Author:    Bruinshoofd, W. Allard

Credit and Capital Markets – Kredit und Kapital, Vol. 39 (2006), Iss. 3 : pp. 455–483

Abstract

This paper surveys the use and usefulness of the investment-cash flow sensitivity in the broad literature on financing constraints in corporate investment. Building on the intense and ongoing debate on this subject matter, it explores directions for further research. Specific attention is paid to connections between corporate investment and cash management. Contemporary research on corporate cash management provides promising footholds to determine more sharply the instances where firms lack the internal means to initiate investment projects. The paper subsequently draws the outlines of a methodology to empirically assess more clearly the role of cash management in financially constrained investment and the informational content of the investment-cash flow sensitivity therein. (JEL E41, G31, G32)

Journal Article Details

Publisher Name:    Global Science Press

Language:    Multiple languages

DOI:    https://doi.org/10.3790/ccm.39.3.455

Credit and Capital Markets – Kredit und Kapital, Vol. 39 (2006), Iss. 3 : pp. 455–483

Published online:    2006-07

AMS Subject Headings:    Duncker & Humblot

Copyright:    COPYRIGHT: © Global Science Press

Pages:    29

Author Details

Bruinshoofd, W. Allard

  1. Almeida, H./Campelo, M. (2002): Financial Constraints and Investment-Cash Flow Sensitivities: New Research Directions. Mimeo. New York University and University of Illinois.  Google Scholar
  2. Almeida, H./Campelo, M./Weisbach, M. S. (2002): The Demand for Corporate Liquidity: A Theory and Some Evidence. Mimeo. New York University and University of Illinois.  Google Scholar
  3. Alti, A. (2003): How Sensitive Is Investment to Cash Flow When Financing Is Frictionless? Journal of Finance 58 (2): 707-722.  Google Scholar
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  5. Bruinshoofd, W. A. (2003): Corporate Investment and Financing Constraints: Connections with Cash Management. DNB Staff Report 110. De Nederlandsche Bank, Amsterdam.  Google Scholar

Section Title Page Action Price
W. Allard Bruinshoofd: Corporate Investment and Financing Constraints: Connections with Cash Management 455
I. Introduction 455
II. The Financing Constraints Paradigm 457
1. Q-models and Reduced Form Investment Equations 458
a) The Analysis of Financing Constraints 458
b) Main Criticism 459
2. Euler Equations 460
a) The Analysis of Financing Constraints 460
b) Main Criticism 461
III. Contemporary Challenges for the Paradigm 462
1. Does the ICFS Measure Financing Constraints? 462
2. Identifying Financing Constraints 464
IV. Managing Finances and Financing Constraints 467
1. Managing the Capital Structure 469
2. Managing Corporate Cash Holdings 470
3. Managing Financing Constraints 472
a) Spare Debt Capacity 472
b) Debt Targets and Deviations 472
c) Precautionary Cash 473
d) Excess Cash 474
4. Endogenizing Cash Management in Investment Models 474
a) Endogenizing Financing in a VIM 475
b) Tailoring VIM to Endogenous Cash Management 476
V. Conclusions 478
References 480
Summary 482
Zusammenfassung 482