To determine whether internal financial resources and liquidity constraints directly impact firm-level capital investment decisions beyond standard neoclassical market valuation models.
Stratified a panel of manufacturing corporations into distinct classes based on historical dividend payout ratios as an indicator of financing constraints.
Estimated empirical investment models incorporating Tobin's q while testing the explanatory power of internal cash flow across firm classes.
Firms retaining most of their earnings exhibited substantial, statistically significant sensitivity of investment to fluctuations in internal cash flow.
Mature, high-dividend firms showed virtually no dependence on internal cash flow for physical capital investment, confirming that external and internal capital are not perfect substitutes.
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Implication
Econometric analysis reveals strong cash-flow sensitivity of investment in financially constrained firms, indicating capital market imperfections restrict corporate growth.