Credit Constraints and Investment-Cash Flow Sensitivities
September 30, 2000
Heitor Almeida
ABSTRACT
This paper analyzes the investment behavior of firms under a quantity constraint on the amount of external funds
which can be raised at a given cost (credit constraints). In this world, investment-cash flow sensitivities decrease
in the degree of credit constraints, until a firm becomes effectively unconstrained. This generates a “U-shaped”
curve for the relationship between sensitivities and credit constraints. From an empirical perspective, the good
news is that we suggest a theoretically consistent way to identify the impact of financial constraints on investment
behavior, at least under the condition that financial constraints affect primarily the quantity of credit available
to firms. The bad news is that our prediction is in a sense the opposite as the one explored in previous empirical
literature.
Subjects: Corporate Finance/Capital Structure; Economics/Macroeconomics
Classification: Theoretical
Heitor Almeida
Institution: Stern School of Business, New York University
Email: halmeida@stern.nyu.edu
Phone: (212) 998-0279
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