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Classes of homogeneous financing constraints and corporate investment

Author

Listed:
  • Alfonsina Iona

    (School of Economics and Finance, Queen Mary University of London)

  • Leone Leonida

    (King’s Business School, King’s College London)

Abstract

Does corporate finance literature accurately identify firms facing homogeneous financing constraints when studying the impact of financing constraints on corporate investment? The short answer is no. The common practice of using pre-determined percentiles of a financing constraint metric compromises the validity of conclusions. Our empirical framework identifies four classes of firms facing homogenous financing constraints independently of the financing constraints metric used. Moreover, we show that while popular metrics of financing constraints may capture financing constraints reasonably well, differently from previous studies the sensitivity of investment to cash flow is inverse basin-shaped. We provide an understanding of this shape by studying investment and financial policies jointly, under different regimes of financing constraints.

Suggested Citation

  • Alfonsina Iona & Leone Leonida, 2024. "Classes of homogeneous financing constraints and corporate investment," Working Papers 982, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:982
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2024/wp982.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Homogeneous Financing constraints; Sorting scheme; Inverse basin shaped investment–cash flow sensitivity; Interdependence of financial policies.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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