Corporate fixed investment and internal liquidity: Evidence from Greek listed companies

Christos Kallandranis,Petros Kalantonis,Abdulkader Aljandali

doi:10.22495/cgsrv4i2p7

Abstract

Utilizing a unique panel dataset of 273 listed firms in the Athens Stock Exchange (ASE) we explore the issue of capital market imperfections with respect to access to investment financing. In particular, we investigate the extent to which investment is sensitive to the availability of internal finance. By employing a fixed-effect model, our empirical results indicate a positive association of cash flow and investment, leading to the conclusion of imperfect substitutability between internal and external finance and thus the importance of the former for investment decisions. According to our knowledge, this is the first study covering the specific tremble period of ASE for Greek manufacturing firms.

Highlights

A large body of empirical research exploring the connection between alternative sources of finance and investment has grown rapidly over the past four decades
Utilizing a unique panel dataset of 273 listed firms in the Athens Stock Exchange (ASE) we explore the issue of capital market imperfections with respect to access to investment financing
The high investment liquidity sensitivity for equation (1) seems to be along the lines of the existing empirical literature. This finding is consistent with the basic conclusion of Fazzari et al (1988) who reported that investment decisions exhibit high sensitivity to firms’ liquidity. It concurs with the results of Mayer (1990) who documents the dominant role of internal financing in investment decisions, which implies that investment policy for the majority of firms is sensitive to current liquidity

Summary

Introduction

A large body of empirical research exploring the connection between alternative sources of finance and investment has grown rapidly over the past four decades. The question of whether or not the level of investment depends on corporate liquidity has drawn considerable attention since the seminal paper by Fazzari, Hubbard, Petersen, Blinder, and Poterba (1988). This is an important issue since the way investment responds to cyclical variations in profits relies on whether availability of internal funds constraints capital expenditure (Bond & Meghir, 1994). Firms are indifferent to funding their investment plans with internal or external funds, since external funds are a perfect substitute for internal capital In this context, funding an investment project should solely depend on the project’s net present value. Alternative theories have shown that internal and external capital are maybe imperfect substitutes as a result of informational asymmetries between lenders and borrowers, linking investment decisions to the severity of financial constraints

Methods

Results

Conclusion