What question did this study set out to answer?

To determine whether internal financial resources and liquidity constraints directly impact firm-level capital investment decisions beyond standard neoclassical market valuation models.

January 1, 1988Brookings Papers on Economic Activity

Financing Constraints and Corporate Investment

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Authors

SFSteven M. FazzariWashington University in St. Louis RHR. Glenn HubbardAmerican Enterprise Institute BPBruce C. PetersenIcahn School of Medicine at Mount Sinai

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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.

Key Points

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.

Cite This Study

Fazzari et al. (1988) studied this question.

synapsesocial.com/papers/69d75ed7f44a16d01ef30a24 https://doi.org/10.2307/2534426

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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.

Financing Constraints and Corporate Investment

Discussion

Member takes

Implication

Key Points

Cite This Study

Financing Constraints and Corporate Investment

Discussion

Member takes

Implication

Key Points

Cite This Study

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