Abstract
Financial constraints are one of the influencing factors on investment decisions. Financial constraints put firms under pressure to forgo investment opportunities to finance their working capital needs. Moreover, some variables like working capital needs and liquidity of a firm are likely to affect the relationship between these two variables. Hence, this study seeks to examine the effect of short-term credit constraints on the investment of small and medium-sized enterprises (SMEs), firms with different characteristics in comparison with large-sized firms. In addition, this correlation is tested by considering the effect of mentioned moderating variables (working capital and liquidity). The sample of this study includes the firms listed in Tehran Stock Exchange from 2011 to 2018, which are considered as SMEs based on some criteria. Multivariate regression models and E-views software are used to test the research hypotheses. The results indicated that short-term credit constraints negatively affect corporate investment. It means that constrained firms invest in fewer investment opportunities because of facing source shortages. Moreover, in companies requiring more working capital, the inverse effect of short-term credit constraints on corporate investment is stronger. Such firms suffer from financial problems and are not able to use their investment opportunities. Additionally, this hypothesis that companies with high liquidity can offset u effects of short-term financial constraints on fixed investment, is not confirmed
Highlights
Firms, financial condition influences their investment decisions
Companies known with financial constraints have invested less in tangible assets. He showed that the negative effect of financial constraints on investment is stronger in the firms with working capital needs
The results further indicated that the investment sensitivity to cash flow due to managerial optimism in companies with financial constraints is higher than those without (Salehi; Mousavi & Moradi, 2017)
Summary
Firms fund their investment projects by selecting the most economical source of financing. They can use internal finance, debt capital, or issue new equity. Under imperfect capital market assumptions, corporates with the most serious agency problems (e.g., SMEs) mostly use internal financing sources and prefer debt to equity if they require external financing (Rui, 2019). Based on this view, corporates with financial constraints have higher investment sensitivity to cash flow (Mulier, Schoors & Merlevede, 2016; Mendoza, 2010; Nicolas, 2019). This paper examines these relationships in Iran, a country with different characteristics from developed ones
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