Effects of financial constraints on corporate policies in Australia

Xin Chang, Tek Jun Tan, Lap Bun Wong, Hongfeng Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

14 Citations (Scopus)

Abstract

We jointly study the impact of financial constraints on Australian companies' investment decisions and demand for liquidity. By examining a large sample of Australian firms over the period 1990-2003, we find that financial constraints not only reduce the sensitivity of investment to the availability of internal funds, but also increase the responsiveness of cash holdings to internally generated cash flows. Further analysis shows that the impact of financial constraints varies across different cash flow states; that is, financial constraints have a small effect on corporate investment and cash policies when cash flows are positive. In contrast, the severity of constraints is high in negative cash flow years in which the cost disadvantage of external finance coincides with deteriorating operating performance.
Original languageEnglish
Pages (from-to)85-108
Number of pages24
JournalAccounting and Finance
Volume47
Issue number1
DOIs
Publication statusPublished - 1 Mar 2007
Externally publishedYes

Keywords

  • Australian firms
  • Cash policy
  • Financial constraints

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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