How Do Financing Conditions Impact Firm Behavior? Evidence from the Gulf Zone

This study examines the impact of financing conditions on firm behavior in the Gulf zone over the period 2005–2014 using a panel of 357 firms. As a main consequence of market frictions, financing constraints have sizeable impacts on how CFOs behave and design their financial policies. We use a sample of firms from the six GCC countries and specify a range of investment equations to explore the behavior of cash flow sensitivities to fixed investment, working capital, and R&D. Our results show that GCC firms seem to have less costly financing sources when financing their inventories and/or holding cash than investing in fixed assets and R&D. Our results indicate that there is heterogeneity of the impact of financing conditions on the behavior of GCC firms. The Omani and Bahraini firms seem to be more oriented toward building their working capital during periods of financial distress in order to finance their fixed and R&D investments. This behavior does not seem to be consistent with the other countries. Indeed, we find sheer evidence that the Saudi, Qatari, Kuwaiti, and Emirati firms do not opt for an alleviation of financing constraints by smoothing the cash flow fluctuations with changes in working capital.