Published : Mar 19, 2013
DOI: 10.1111/jofi.12047
Abstract
We study how costly external finance affects investment across firms. We assume that external finance is more costly in recessions and during periods of low investor sentiment. We find that investment is less sensitive to q, and more sensitive to cash flow during such times, which is consistent with greater financial constraints. External finance causes these effects; when the economy is expanding or when investor sentiment is high, firms with high q and low cash flow issue more shares and debt and invest, thereby increasing investment-sensitivity to q, and reducing investment-sensitivity to cash flow. Share issuance plays a larger role than debt issuance, consistent with financially constrained firms preferring less leverage. We further verify our interpretations by showing that investment predicts increasing profitability more strongly when external finance is more costly, which is consistent with financially constrained firms choosing the most valuable projects.
요약하면 외부 Finance 요소에 대한 리서치. Recession 기간에는 이득보다는 Cash flow 에 더욱 민감하고, Economy expanding 기간에는 그 반대가 성립하더라. Share issuance 가 더 크게 영향을 미친다. External finance 가 더욱 민감할 때는 경제를 예측하는 행위가 더욱 의미가 있다.
Introduction Summary
지난 연구를 통해서, systematic finance cost 가 external finance 에 어떻게 영향을 미치는지 확인했다. 우리는 Business cycle과 systematic investor sentiment 를 external financing cost로 활용했다. External finance is costly means poor economic condition or low investment sentiment 를 뜻한다.
Our first hypothesis is that investment-sensitivity to growth opportunities will decline with external financing costs. We assume that all else equal, firms with more valuable growth opportunities are in greater need of external finance, as these firms ought to invest more.
Our second hypothesis is that investment-sensitivity to cash flow increases with external financing costs. (즉, 투자자의 민감도는 external financing cost와 같이 오르락 내리락 한다는 것이다.)
Our third hypothesis is therefore that firms with high growth opportunities and low cash flow actually do use more external finance when external finance costs are low.
Our fourth hypothesis is that investment will more strongly predict profitability when external finance is more costly.
We test these hypotheses with a sample of U.S. firms over a 43-year period. We use four costly financing measures: two that reflect the business cycle (an expansion dummy and an increasing industrial production dummy) and two that reflect systematic investor sentiment (the Baker and Wurgler-sentiment index and the University of Michigan-consumer sentiment index). The original investor sentiment indices are regressed on several different business cycle variables, and the residuals from these regressions are used as the investor sentiment proxies in our tests. We use the business cycle and investor sentiment proxies in the same regressions, so the effect of one is measured while controlling for the other. We get robust results with both types of measures, so in the discussion that follows when we mention "financing costs” we refer to both effects.
Our results are summarized as follows. We find that investment-sensitivity to growth opportunities is higher, and investment-sensitivity to cash flow is lower, when external finance is less costly. The findings therefore suggest the external finance costs have significant effects on both investment and employment.
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