Are Financial Constraints an Important Determination in a Firm's Behavior

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The Cash Flow Sensitivity of Sash Research Question Does the link between financial constraints and firms demand for liquidity can help us identify whether financial constraints are an important determinant of firm behavior. Contribution Previous scholars, Fazzari, Hubbard, and Petersen, proposed that investment activities of a firm is limited by the firm’s financial situation, which is called financial constraints. When firms face financial constraints, the firm’s investment-cash flow sensitivity is high. When a firm face no financial constraints, its investment-cash flow sensitivity is low. However this theory was doubtful by some scholars. In 1997, Kaplan and Zingales propose an exactly opposite theory. In 2001,…show more content…
The Cash Flow Sensitivity of Sash Research Question Does the link between financial constraints and firms demand for liquidity can help us identify whether financial constraints are an important determinant of firm behavior. Contribution Previous scholars, Fazzari, Hubbard, and Petersen, proposed that investment activities of a firm is limited by the firm’s financial situation, which is called financial constraints. When firms face financial constraints, the firm’s investment-cash flow sensitivity is high. When a firm face no financial constraints, its investment-cash flow sensitivity is low. However this theory was doubtful by some scholars. In 1997, Kaplan and Zingales propose an exactly opposite theory. In 2001, due to these conflicting theories, Gomes proposed that there is no correlation between financial constraints and investment-cash flow sensitivity. So investment-cash flow sensitivity can not reflect a firm’s extent to financial constraints. in 2004, the author proposed that use cash flow sensitivity of cash to replace investment-cash flow sensitivity to further verify that cash flow sensitivity of cash is an important determinant of firm behavior. The contribution of this is to further verify Gomes’s theory and develop a new link between financial constraints and firm behavior. This finding is very important to for understanding how financial constraints can determine firm behavior. Hypothesis Previous study proposed that when
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