An Empirical Research On The Relationship Between Financing Constraints And Investment-Cash Flow Sensitivities For The Listed Firms In China

For a long time, based on the Information Asymmetry Theory, the relationship between financing constraints and investment-cash flow sensitivities has been debated by the academe. Some scholars find the firms that appear more financially constrained exhibit significantly greater sensitivities than firms that appear less financially constrained; the others find the relationship between financing constraints and investment-cash flow sensitivities is not monotonous.Based on a sample of the listed companies of Shanghai and Shenzhen stock markets from 1998 to 2005, the paper offers a new method to discriminate the degree of financing constraints, and investigates the influence of corporate governance and positive-negative cash flow on the relationship between financing constraints and investment-cash flow sensitivities.The empirical results show that: (1) In full sample, firms that appear more financially constrained exhibit significantly greater sensitivities than firms that appear less financially constrained, which supports the results of FHP(1988). (2) In the well-governance sample, firms that appear more financially constrained exhibit significantly greater sensitivities than firms that appear less financially constrained; in the bad-governance sample, firms with medium degree of financing constraints exhibit significantly less sensitivities than firms either with high degree of financing constraints or with low degree of financing constraints, the relationship between the degree of financing constraints and investment-cash flow sensitivities is U shape. (3) When the cash flow is positive, firms with high degree of financing constraints exhibit significantly greater sensitivities than firms with low degree of financing constraints; when the cash flow is negative, firms with high degree of financing constraints exhibit significantly less sensitivities than firms with low degree of financing constraints. These results suggest that the Information Asymmetry Theory can't fully explain the relationship between financing constraints and investment-cash flow sensitivities, corporate governance and positive-negative cash flow may be the important factors which have led the inconsistency related to the conclusion of the study.The innovations of the paper are as follows: (1) Offer a new method to discriminate the degree of financing constraints; (2) Consider corporate governance and positive-negative cash flow factors, investigate the influence of corporate governance and positive-negative cash flow on the relationship between financing constraints and investment-cash flow sensitivities.The conclusion of this paper not only provide a new direction to study the relationship between financing constraints and investment-cash flow sensitivities, enrich the domestic research on the investment under financing constraints, but also provide theoretical guidance for the country's macro-control, business investment and financing, design of corporate governance structure.