Managerial entrenchment, financial constraints, and investment choice in unlisted firms

Abstract

AbstractThis paper examines how internally generated cash is allocated for investment in unlisted firms in the post‐global financial crisis period. We estimate models using a panel data set from unlisted firms in the United Kingdom from 2009 to 2014. With the use of a commercially available credit rating and a widely used index in the literature to proxy for external financial constraints, the paper concludes that less financially constrained firms display a higher investment‐cash flow sensitivity. This association has been consistent across the post‐global financial crisis period. We find some evidence to suggest that investment inefficiencies reduce investment‐cash flow sensitivity, and this is intensified in the presence of external financial constraints. We extend the investment choice literature in the presence of financial constraints using evidence from unlisted firms. We also enhance the investment choice literature by incorporating the managerial entrenchment effect along with financial constraints. Provision of financial support for private entities is a crucial policy focus for any government. We call for policymakers to enhance microfinancing options for unlisted firms to reduce the impact from external financial frictions.