Financing Constraints, Working Capital Management And Corporate Investment

Corporate investment is one of the central topics of corporate finance. Make the right investing decisions is essential to any companies, because it determines the survival and development of all companies. From the macro economy perspective, investment is one of the important driving force of the economy. Meanwhile, investment of all companies constitutes the main part of the social gross investment. As a result, it is meaningful to study the determinants of firm-level investment, since it will not also make implications of corporate investment, but also of economic fluctuation and development.Traditional theory of corporate investment considers corporate investment and financing as independent based on a series of strict hypothesis. But in the real world, financing is critical to corporate investing decisions. As the development of imperfect market theory, financing constraints impacting on corporate investment are paid more attention to. Fazzari, Hubbard and Petersen(1988) studied this topic among the first. Based on their study, companies under financing constraints show very strong investment-cash flow sensitivity. As a result, they considered investment-cash flow sensitivity as the evidence of financing constraints. But this conclusion is based on the empirical division of financing constraints. And the later on study on the relationship of financing constraints and investment-cash flow sensitivity also points the defect of Tobin Q referring to the potential developing chance of a company as inaccurate.This paper, based on the Tobin Q investment model of FHP, introduce working capital investment as the instrument to avoid the former two problems of FHP theory, to study financing constrains’ impacts on investment, the relationship of financing constraints and investment-cash flow sensitivity and the smoothing impact of working capital on fixed assets investment.Traditional corporate investment theory ignores the adjustment cost of capital investment. In fact, adjustment cost is essential to fixed assets investment. Working capital has more liquidity than fixed assets. To make the most profit, companies are supposed to adjust the scale of working capital to smooth the fixed assets investment to minimize the adjustment cost.The empirical study of this paper has two models to test and verify. Model (1) is the standard Q model, and model (2) introduces working capital investment into Q model. Using the panel data of261Chinese listed manufacturing companies over the period of1998-2012, the paper is going to testify three predictions based on theory in Chapter3and current situation analysis in Chapter4. First, because of the imperfection status of capital market of China and both low governance level of listed companies, the listed manufacturing companies studied are facing financing constraints. That means we will get a positive coefficient for internal cash flow in model (1). But in return, if we do get a statistic significant positive coefficient for internal cash flow, we can’t conclude that these companies are faced with financing constraints. Second, working capital investment is positively connected to internal cash flow. Third, given prediction two being proved, the investment-cash flow sensitivity showed in model (1) is from financing constraints, and companies positively manage working capital to smooth fixed assets investment, then, the coefficient of working capital will be significantly negative. And the absolute value of the cash flow coefficient should be larger in model (2) than in model (1).In the empirical study, to get reliable econometric results, this paper screens all the financial data from CSMAR based on certain principles. And get261listed manufacturing companies in the end. Because of the irrational investment behavior of the stock market and the dramatic fluctuation of stock price, main business’s increasing rate of income substitute Tobin Q as proxy for the investment opportunity.The regression results verify all three predictions above. Conclusions are drawn as follows:First, The smoothing impact on working capital on fixed assets investment is significant. Second, ignoring this impact, we can’t say companies are under financing constraints even it shows dramatic investment-cash flow sensitivity. Taking this factor into consideration, investment-cash flow sensitivity reflects financing constraints more profoundly. Third, to companies under financing constraints, it’s important to manage working capital investment as a tool to smooth fixed assets investment to maximize their value.In Chapter3, this paper broadens the concept of financing constraints and using Tirole’s two period investing model to study the causes of financing constraints. It reveals that information asymmetry and agency cost are both causes of financing constraints. Then, four corporate investing models under financing constraints are presented and evaluated. The last part is about the smoothing impact of working capital on fixed assets investment, using a simple mathematical method.There are7chapters in total. Chapter1is introduction, which represents the research background, motivation, key concepts, and methodology. Chapter2reviews the existing literature on the field of this study. Chapter3is about related theory and models. Chapter4is analysis of the investing and financing status of Chinese listed companies. Chapter5is the empirical study, the main part of this paper. Chapter6consists of suggestions to both government and companies based on the results of the empirical study. The last chapter, is about the innovation and shortage of this study.