Empirical Studies On Financing Constraints Of Corporate Investment And Cash Flow Sensitivity

With the development of corporate capital structure theories and researches in the relationship between corporate investment and financing decision making, the issue of corporate investment-cash flow sensitivity under financial constraints has attracted wide attentions from both international and domestic scholars. Due to the prevalence of asymmetric information and agency problems under the imperfect market conditions, the difference in financing sources choice will cause to companies different capital costs, According to the Pecking Order Theory, companies prefer to choose internal financing over external ones to support investment decisions considering their respective costs. Since companies are faced with different financial constraints when they try to acquire financing from external sources, their dependence on the internal cash flow are also of different characteristics.This paper mainly examines the investment-cash flow sensitivity issue. It selects 'samples of China-listed manufacturing companies between the years of 2003 and 2009. Besides, with regards to the special situations in China, it uses two indicators (SOE or not, and company interest cover) as criteria to measure the different extent of financial constraints companies are faced with, and classifies the whole sample into groups. Then with methods of descriptive statistics and regression analysis, the paper's findings suggest that, there exists a significant positive correlation between the corporate investment decisions and internal cash flow, and the investment-cash flow sensitivity is mainly caused by the levels of financial constraints facing the companies. Companies with stricter financial constraints tend to have more sensitive investment-cash flow relationships. Moreover, the findings also suggest that the investment scales of companies under strict financial constraints get more negative impact from the volatility of their internal cash flow.