Capital Investment Under Financial Constraints and the Diminishing Role of Cash Flows
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USyd Access
Type
ThesisThesis type
Doctor of PhilosophyAuthor/s
Ho, Shawn Jian LiangAbstract
This thesis provides insights into the capital investment behaviour of firms and examines the efficiency of their capital allocation decisions through an analysis of investment-cash flow sensitivities. While internal liquidity is widely acknowledged to play a trivial role in ...
See moreThis thesis provides insights into the capital investment behaviour of firms and examines the efficiency of their capital allocation decisions through an analysis of investment-cash flow sensitivities. While internal liquidity is widely acknowledged to play a trivial role in determining investment in perfect capital markets, the existence of market frictions may give rise to agency problems, as well as, restricted access to finance, which lead to the excess sensitivity of cash flows widely documented. This thesis implements a series of analyses to shed light on the interpretability of investment-cash ow sensitivities. The first set of analyses attempts to examine the drivers of these sensitivities by adopting a novel research design, that allows for firm-level heterogeneity to be exploited at the cross-section through the use of partitional clustering. The results from these tests confirm the notion of increased investment-cash flow sensitivity being a manifestation of inefficient resource allocation, as a result of both agency problems and financial constraints. More strikingly, however, the analysis documents a disappearance in the cluster of firms that display attributes consistent with financial constraints over time, which could serve as an explanation for the secular decline in the sensitivity of cash flows observed. This is corroborated by further analysis employing stochastic frontier analysis to examine the inter-temporal variation in investment behaviour and the evolution of financial constraints over time. In addition to circumventing the split-sample regression approach, which has undermined earlier work in the literature due to the lack of a priori classification criteria, the evidence presented is also robust to correction for mismeasurement in Tobin’s q. Overall, the results suggest that the decreased dependence on internal funds to finance investment is consistent with the notion of an alleviation of financial constraints, as firms face less restricted access to external capital.
See less
See moreThis thesis provides insights into the capital investment behaviour of firms and examines the efficiency of their capital allocation decisions through an analysis of investment-cash flow sensitivities. While internal liquidity is widely acknowledged to play a trivial role in determining investment in perfect capital markets, the existence of market frictions may give rise to agency problems, as well as, restricted access to finance, which lead to the excess sensitivity of cash flows widely documented. This thesis implements a series of analyses to shed light on the interpretability of investment-cash ow sensitivities. The first set of analyses attempts to examine the drivers of these sensitivities by adopting a novel research design, that allows for firm-level heterogeneity to be exploited at the cross-section through the use of partitional clustering. The results from these tests confirm the notion of increased investment-cash flow sensitivity being a manifestation of inefficient resource allocation, as a result of both agency problems and financial constraints. More strikingly, however, the analysis documents a disappearance in the cluster of firms that display attributes consistent with financial constraints over time, which could serve as an explanation for the secular decline in the sensitivity of cash flows observed. This is corroborated by further analysis employing stochastic frontier analysis to examine the inter-temporal variation in investment behaviour and the evolution of financial constraints over time. In addition to circumventing the split-sample regression approach, which has undermined earlier work in the literature due to the lack of a priori classification criteria, the evidence presented is also robust to correction for mismeasurement in Tobin’s q. Overall, the results suggest that the decreased dependence on internal funds to finance investment is consistent with the notion of an alleviation of financial constraints, as firms face less restricted access to external capital.
See less
Date
2019-06-30Licence
The author retains copyright of this thesis. It may only be used for the purposes of research and study. It must not be used for any other purposes and may not be transmitted or shared with others without prior permission.Faculty/School
The University of Sydney Business School, Discipline of AccountingAwarding institution
The University of SydneyShare