Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales

Gayane Hovakimian and Sheridan Titman

No 9432, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the importance of financial constraints for firm investment expenditures by looking at the relationship between investment expenditures and proceeds from voluntary asset sales in financially healthy US manufacturing companies. Specifically, we examine whether asset sales have a greater influence on investment expenditures for firms that are likely to be financially constrained. Asset sales may provide a cleaner indicator of liquidity than cash flow since it appears not to be positively correlated with future investment opportunities. The cross-sectional differences in firm investment expenditures are examined using an endogenous switching regression model with unknown sample separation, which does not require an a priori classification of firms or knowledge of their financial constraints. We find that after controlling for investment opportunities and cash generated from operations, cash obtained from asset sales is a significant determinant of corporate investment. Moreover, the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be associated with characteristics associated with financial constraints.

JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2003-01
New Economics Papers: this item is included in nep-cfn and nep-mfd
Note: CF
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Citations: View citations in EconPapers (8)

Published as Hovakimian, Gayane and Sheridan Titman. "Corporate Investment With Financial Constraints: Sensitivity Of Investment To Funds From Voluntary Asset Sales," Journal of Money, Credit and Banking, 2006, v38(2,Mar), 357-374.

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Journal Article: Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales (2006)
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