Abstract
The use of investment cash flow sensitivity as a measure of financing constraints is an unresolved research agenda. This paper endeavors to explain the conflicting evidence by using proxies for both internal financial constraint and external financial constraint measures. Data is taken from selected six African countries, a region where no previous studies are conducted. It is observed that the investment curve is Ushaped when firms are classified on the basis of internal financial constraint measure (i.e. cash flow). Using external financial constraint proxies (age, size and payout) it is found that all category of firms show positive and significant investment cash flow sensitivity. This suggests that the sampled African firms are externally financial constrained. It is concluded that the way firms are a priori classified as internal vs. external financial constrained matters. This raises the issue of whether the term financial constraints itself is a multidimensional construct.
Highlights
The issue of financing constraints has been on the research agenda of academics for a long period
This study investigated the use of investment cash flow sensitivity as a measure of financing constraints using African data, a region not studied till
The result of the study confirms that all categories of firms show positive and significant investment cash flow sensitivity using external financial constraint proxies
Summary
The issue of financing constraints has been on the research agenda of academics for a long period. The extant literature tried to ascertain the causes and effects of financing constraint, measuring the concept of ‘financing constraints’ itself is still unresolved research agenda (Silva and Carreira, 2012). Many attempts were made by different authors to measure firm-level financing constraints (Silva & Carreira, 2012). Some of these measures include indirect measures such as the different cash flow sensitivities, direct measures such as company reports, selfevaluation survey data and the use of indexes. Despite the criticism to all measures, these authors are of the view that the ICFS, as developed by the seminal contributors to this field, Fazzari, Hubbard and Peterson (1988), is the leading approach used in the measurement of financing constraints, and many authors have tested its validity in a variety of settings
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