The Research Based On Firm-level Multiplier

The interplay between real and financial decisions is a central issue in corporate finance research. Accordingly, a large body of literature examines when firms should invest and how they should finance their projects. But these literature often fails to appreciate the impact of financing frictions on firms’ability to raise funds for investment. And this impact will interfere the firms’ investment decisions. As a result, the investment process should be taken as an endogenous to firms financial status and financing decisions. It’s not an exogenous variable as conventional research take. This theory is attached importance, a large body of literature investigates the impact of financial frictions by different perspective. A large part if these literature use cash flow as a proxy variable of firms’ability of finance. This paper will use another inherent attribute of the firm-the tangibility of its operating assets-to characterize a relation between firms’real and financial decisions as a proxy variable of firms’ability of finance. This influencing mechanism is called the firm-level credit multiplier.the theory of the firm-level credit multiplier imply that there is no perfect capital market in the world, firm will face contracting friction because of information asymmetry and agency problem. This problem will keep firm from gaining capital in a reasonable cost when the firm have no cash flow to support a investment opportunity. So the firm lose this investment opportunity and diminish the scale of investment. This phenomenon called financial frictions. The firm facing financial frictions will benefit from the larger capacity of debt due to tangible asset. The asset tangibility amplifies the impact of shocks to the firm’s opportunity set onto the firm’s investment and financing across time. We call this mechanism the firm-level credit multiplier. In the firm with no financial frictions, this mechanism isn’t remarkable.This paper propose a empirical model by using China’s listed company data based on their research. The market of China is not a mature market, and Chinese nature of society make government intervention be a important factor. Government will give some firms which have no investment prospects and enough tangible assets a lot of unsecured loan; Meanwhile, the stock market in China is approval system, and the bond market is undeveloped. So some firms with opportunities will fail to finance because of the complicated mechanism. This factor seriously influence this paper’s result. So we divide the data into state-owned enterprises and non-state-owned enterprises, and discuss their feature respectively. Meanwhile, the outbreak of the financial crisis of2007influence the firms’investment and financing decisions, so we also divide data into before the financial crisis and after the financial crisis. We use this data study in Chinese market, non-state-owned enterprises which are facing with financing frictions can increase the sensitivity of investment-Tobin Q by increasing their tangibility; and others’tangibility have no influence on the sensitivity of investment-Tobin Q.The result of this paper imply that before the financial crisis, not only state-owned enterprises but also non-state-owned enterprises don’t suffer from financial frictions. After the financial crisis, however, non-state-owned enterprises can obviously increase their investment by improve asset tangibility. State-owned enterprises are still supported by the government, but some of them suffer from financial frictions. The empirical results of non-state-owned enterprises imply thattangibility can improve the debt capacity of the firm, and make the firm increase investment when their opportunities increase. The meaning of this research can be divided into theory and practice:In theory, traditional Tobin Q theory’s opinion is that firm is not subject to financing constraints, and investment opportunities(Tobin Q) can improve investment directly. After the financing constraints theory is raised, scholars’attentions are cashflow. They study the influence of investment-Tobin Q, and prove that cashflow can relieve the financing constraints. Meanwhile, the research about tangibility mainly focus on the relationship between tangibility and the capital structure. The evidence in the literature is consistent with the idea that asset tangibility matters for raising external financing. But few literature relate it to firms’investment decisions. This paper import tangibility into Tobin Q theory on the basis of the predecessors studied, and relate firms’ financial decisions to investment decisions. This paper research the influence of corporate structure to the company investment, widen the Tobin Q model, and provide a new perspective for the relationship between investment and financing decisions for the company.In practice, this paper’result is meaningful for corporate governance structure and investors to decision-making. Although the capital structure is based on firms’line of business and capital accumulation process. It can’t change in a short-term. But this firm also should decide whether to invest in tangible assets. The fact that tangible asset can expand the company’s liabilities must be taken the attention of the decision-makers. To investors, estimating a firm isn’t only based on the growth index of companies such as the market value of p/e ratio, but also based on the debt capacity of a firm. We should judge that whether the firm can support investment. Tangibility is a key factor of debt capacity.