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External Finance Constraints and the Timing of Investment Spikes

Author

Listed:
  • Kaoru Hosono

    (Policy Research Institute, Ministry of Finance / Gakushuin University)

  • Masaki Hotei

    (Policy Research Institute, Ministry of Finance)

  • Chie Umezaki

    (Formerly Affiliated with Policy Research Institute, Ministry of Finance)

Abstract

Is the timing of a firm's large-scale investment (investment spike) affected by external finance constraints? We use firm-level quarterly data including those on unlisted firms, and estimate the investment hazard rate, i.e., the probability of undertaking a new investment spike today as a function of the time elapsed since the last spike, and examine how external finance constraints affect the hazard rate. Our results show that the firms which fall under industries heavily dependent on external finance, those which fall under industries with low tangible fixed asset ratios, and those firms with a large amount of outstanding debt compared with cash flow, have lower hazard rates than other firms. This suggests that external finance constraints delay the timing of investment spikes. Further, the estimated hazard rate is an increasing function of time, which is consistent with the theoretical prediction. Our results suggest that a policy of alleviating companies' external finance constraints will be helpful if fiscal and monetary policies are to be effective quickly.

Suggested Citation

  • Kaoru Hosono & Masaki Hotei & Chie Umezaki, 2013. "External Finance Constraints and the Timing of Investment Spikes," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(2), pages 365-404, March.
    • Handle: RePEc:mof:journl:ppr021d
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    References listed on IDEAS

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    1. Sourafel Girma & Sandra Lancheros & Alejandro Riaño, 2016. "Global Engagement and Returns Volatility," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(6), pages 814-833, December.

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    More about this item

    Keywords

    external finance constraints; investment spike;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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