The Effects Of Financial Constraints On Investment Decisions And Cash Holding Policies

After the financial crisis, a series of foreign corporations filed for bankruptcyprotection. Greece, Spain and other European countries fell into sovereign debt crisis.The world economy has entered a slow recovery. In the case of the rising cost ofexternal capital, both domestic enterprises and foreign enterprises are holding a lot ofcash. In addition, in the research of corporate finance, the effects of financialconstraints on corporate policies (the investment decision-making and cash holdingspolicies) have already become an important area of research. Since Fazzari, Hubbardand Petersen (1988) have done pioneering research on financial constraints, bothdomestic and foreign scholars had in-depth discussions on the issue. They have beenmade fruitful research results, which also included Almeida, Campello andWeisbach(2004) had done creative research on the cash-cash flow sensitivity.However, the scholars did not draw the same conclusion. Therefore, it is practicallyand theoretically significant to continue to explore the financial constraints problemwhen the financial constraints are even more severe, especially in the guide ofdeveloping appropriate corporate policies.The financial constraints result from the imperfect capital market. Asymmetricinformation, agency costs and transaction costs led external financing costs are higherthan the cost of internal capital. Therefore, some valuable investment opportunitieshad been missed and more cash is held based on the precautionary motive. In thispaper, theoretical analysis and empirical research methods are used to explore theimpact of financial constraints on corporate policies. Then, the effects of themechanism are re-examined in the situation of negative internal cash flow. Byexamine a large sample of the Shanghai and Shenzhen A-share listed corporationsover the period2007to2011, we will get the conclusion.The first section of the paper introduces the situation of financial constraints andreviews some of existing researches. In the second section of theoretical analysis, onthe basis of the analysis of financing constraints principle, Bond, Meghir’s(1994)framework and Almeida etal’s(2004) analysis model are established to analyze themechanisms of financial constraints on corporate policies as well as negative casheffects on the mechanisms. In empirical analysis section, four multiple linearregression models of financing constraints are established based on the relevantscholars’ researches. And the size of the corporation, the actual control human natureand the member of the Group are chosen to classify whether the corporation is divided into the group of financial constraints or not. On the basis of all work, the impact offinancial constraints on corporate policies is empirically researched, and afterdistinguishing between positive and negative internal cash flow, the effects offinancial constraints is analyzed again. The regression results show that financialconstraints not only reduce the sensitivity of investment to the available of internalcash flow, but also increase the responsiveness of cash holdings to internal funds.Further analysis show that the impact of financial constraints varies across differentcash flows state. When internal cash flow is negative, financial constraints made thelower sensitivity of investment to the available of internal cash flow and the highersensitivity of cash holdings to the internal funds. Finally, recommendations areadvised based on the conclusions of this study, and the limitations of the study arepointed out.