Financial Constraints, Asset Tangibility, and Corporate Investment

Abstract

When firms are able to pledge their assets as collateral, investment and borrowing become endogenous: pledgeable assets support more borrowings that in turn allow for further investment in pledgeable assets. We show that this credit multiplier has an important impact on investment when firms face credit constraints: investment-cash flow sensitivities are increasing in the degree of tangibility of constrained firms' assets. If firms are unconstrained, however, investment-cash flow sensitivities are unaffected by asset tangibility. Crucially, asset tangibility itself may determine whether a firm faces credit constraints -firms with more tangible assets may have greater access to external funds. This implies that the relationship between capital spending and cash flows is nonmonotonic in the firm's asset tangibility. Our theory allows us to use a differences-in-differences approach to identify the effect of financing frictions on corporate investment: we compare the differential effect of asset tangibility on the sensitivity of investment to cash flow across different regimes of financial constraints. We implement this testing strategy on a large sample of manufacturing firms drawn from COMPUSTAT between 1985 and 2000. Our tests allow for the endogeneity of the firm's credit status, with asset tangibility influencing whether a firm is classified as credit constrained or unconstrained in a switching regression framework. The data strongly support our hypothesis about the role of asset tangibility on corporate investment under financial constraints.

Stock Market Liquidity and Firm Investment: Evidence from Vietnam

“…If a company is not facing financial constraints because they have higher profits, they tend to have higher investment. This outcome is similar to the finding of Almeida & Campello (2007).…”

Corporate efficiency, credit status and investment

“…They interpret the varying effect of cash flow on investment across the two groups of US manufacturing firms in terms of imperfect substitutability between different sources of finance and their results provide strong evidence that such effects vary with the severity of agency cost problems. Hovakimian and Titman (2006), Almeida and Campello (2007), Adelegan and Ariyo (2008), Hobdari, Jones, and Mygind (2009) also apply the switching regression technique for their financial constraints analysis.…”

“…Exploring the idea that the financial constraint status is endogenously related to the tangibility of the firm's assets, Almeida and Campello (2007) show that investment-cash flow sensitivity for the constrained firms increases with the tangibility of their assets, but not so for unconstrained firms using the universe of manufacturing firms available from COMPUSTAT. Moreover, their switching regression results also show that asset tangibility affects the credit status of the firms and the investment-cash flow sensitivities are not monotonically related to the degree of financing constraints.…”

“…This model allows determination of firms' probability of facing constrained or unconstrained access to credit as well. Hu and Schiantarelli (1998), Hovakimian and Titman (2006), Almeida and Campello (2007) use such models in their attempt to address the problems in testing for financial constraints.…”

Restrições financeiras e a decisão de investimento das firmas brasileiras

“…Esses resultados diferem substancialmente daqueles evidenciados em estudos anteriores no Brasil e constituem uma evidência (original) da existência do efeito multiplicador de cré-dito no nível de firma. Almeida and Campello (2007) …”