Financial constraints and corporate investment in Asian countries

This study overcomes the analytic shortcomings of the linear investment models and applies a Panel Smooth Transition Regression model to examine the investment ratios of 519 non-financial listed firms in six Asian countries over the period of 1991–2004. We find that investment-cash flow sensitivities vary across firms in the sample countries. Additionally, our findings also show that investment-cash flow sensitivity has also been affected by the business cycle in these countries. Furthermore, we find new evidence that tangible assets play a significant role in explaining the increase (decrease) in the investment-cash flow sensitivities for South and East Asian countries. These results imply that possession of the tangible assets increases debt capacity, which in turn reduces under-investment. These new findings have significant implications for financing and investment choices of the firms in the sample countries.