Sensitivity of the Investments of Sub-Saharan Firms to Financial Constraints

Author(s)
Elie Ngongang

Affiliation(s)

Department Quantitative Techniques, Faculty of Economic and Management, University of Yaounde II, Yaounde, Cameroon.

Department Quantitative Techniques, Faculty of Economic and Management, University of Yaounde II, Yaounde, Cameroon.

ABSTRACT

Investment is an important instrument of growth and competitiveness for non financial firms. However, these firms have limited financial resources (or liquidity) at their disposal. The financial constraint is defined as a conditionality to be met in order to have access to liquidity by assuming that the information held by shareholders is perfect, and that financial markets are efficient. We have attempted in this study to analyze empirically the impact of these financial constraint on the investments of Sub-Saharan manufacturing firms. We carried out an empirical analysis of a sample of 73 firms belonging to the different manufacturing sectors listed on the stock market during the period 1998-2009, and by taking inspiration from panel data methodology. The empirical tests emphasize the fact that the manufacturing firms of Sub-Saharan countries, including the smallest ones and those with which financial institutions have no close relations, witness an environment with a strong information asymmetry between borrowers and lenders. These firms are constrained in their access to external indebtedness due to the levelling-off of indebtedness. However, taking account of uncertainty could enrich the extension of this study.

Cite this paper

E. Ngongang, "Sensitivity of the Investments of Sub-Saharan Firms to Financial Constraints,"*Journal of Mathematical Finance*, Vol. 3 No. 1, 2013, pp. 211-221. doi: 10.4236/jmf.2013.31A020.

E. Ngongang, "Sensitivity of the Investments of Sub-Saharan Firms to Financial Constraints,"

References

[1] A. Glesne and G. Legris, “La Décision d’Investissement des Grandes Sociétés Francaises une Approche Econométrique,” Revue économique, Vol. 25, No. 1, 1974, pp. 49-74.

[2] F. Modigliani and M. Miller, “The Cost of Capital, Corporate Finance, and the Theory of Investment,” American Economic Review, Vol. 48, No. 3, 1958, pp. 97-261.

[3] S. M. Fazzari, R. G. Hubbard and B. C. Peterson, “Financing Constraints and Corporate Investment,” Brookings Papers on Economic Activity, Vol. 1, No. 1, 1988, pp. 141-195. doi:10.2307/2534426

[4] R. Carpenter and A. Guariglia, “Cash Flow, Investment, and Investment Opportunities: New Tests Using UK Panel Data,” University of Nottingham Discussion Paper n 03/24, 2003.

[5] K. Gugler, D. C. Mueller and B. B. Yurtoglu, “Marginal q, Tobin’s q, Cash-Flow and Investment,” Southern Economic Journal, Vol. 70, No. 3, 2004, pp. 512-531. doi:10.2307/4135328

[6] A. Minton and C. Schrand, “The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing,” Journal of Financial Economics, Vol. 54, No. 3, 1999, pp. 423-460. doi:10.1016/S0304-405X(99)00042-2

[7] S. C. Vogt, “The Cash Flow/Investment Relationship: Evidence from U.S. Manufacturing g Firms,” Financial Management, Vol. 23, No. 2, 1994, pp. 3-20. doi:10.2307/3665735

[8] S. N. Kaplan and L. Zingales, “Do Financing Constraints Explain Why Investment is Correlated with Cash-Flow?” NBER Working Paper, N5267, 1995.

[9] A. Heitor and M. Campello, “Financial Constraints, Asset Tangibility, and Corporate Investment,” Review of Financial Studies, Vol. 20, No. 5, 2007, pp. 1429-1460. doi:10.1093/rfs/hhm019

[10] M. T. Whited, “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data,” Journal of Finance, Vol. 47, No. 4, 1992, pp. 1425-1460. doi:10.1111/j.1540-6261.1992.tb04664.x

[11] S. Bond and C. Meghir, “Dynamic Investment Models and the Firm’s Financial Policy,” Review of Economic Studies, Vol. 61, No. 2, 1994, pp. 197-222. doi:10.2307/2297978

[12] Y. Daoud and A. Kammoun, “Contraintes Financières et Comportement d’Investissement: Le cas des Entreprises Tunisiennes Cotées,” Revue Libanaise de Gestion et d’économie, Vol. 1, No. 5, 2011, pp. 1-33.

[13] S. N. Kaplan and L. Zingales, “Do Investment Cash-Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics, Vol. 115, No. 2, 1997, pp. 707-712. doi:10.1162/003355300554782

[14] S. Nivoix, J. Faouzzi and W. Saidani, “Sensibilité des Investissements aux Cash-Flows et Degré de Contrainte Financière des Firmes: Le cas des keiretsujaponais,” Working Paper, Université de Tunis, 2003.

[15] T. Tobin, “A General Equilibrium Approach to Monetary Theory,” Journal of Money, Vol. 1, No. 1, 1969, pp. 15-29. doi:10.2307/1991374

[16] E. Malinvaud, “Profitability and Unemployment,” Cambridge University Press, Cambridge, 1980.

[17] E. Malinvaud, “The Challenge of Macroeconomic Understanding,” BancoNazionale Del Lavoro Quarterly Review, Vol. 1, No. 162, 1987, pp. 219-238.

[18] F. Modigliani and M. Miller, “Some Estimates of the Cost of the Capital to the Electric Utility Industry, 1954-1957,” American Economic Review, Vol. 56, 1957, pp. 333-391.

[19] F. Hayashi, “Tobin’s Marginal q and Average q: a Neoclassical Interpretation,” Econometrica, Vol. 50, No. 1, 1982, pp. 213-224. doi:10.2307/1912538

[20] E. Malinvaud, “Econometric Methodology at the Cowles Commission: Rise and Maturity,” Econometric Theory, Vol. 4, No. 2, 1988, pp. 187-209. doi:10.1017/S0266466600012020

[21] M. Jensen, “Agency Cost of Free Cash-Flow, Corporate Finance, and Takeovers,” American Economic Review, Vol. 76, No. 2, 1986, pp. 323-329.

[22] M. Jensen and W. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics, Vol. 3, No. 4, 1976, pp. 305-360. doi:10.1016/0304-405X(76)90026-X

[23] L. Lang and R. Litzenberger, “Dividend Announcements: Cash Flow Signalling vs. Free Cash Flow Hypothesis,” Journal of Financial Economics, Vol. 24, No. 1, 1989, pp. 181-191. doi:10.1016/0304-405X(89)90077-9

[24] A. Heitor and M. Campello, “Financial Constraints and Investment-Cash Flow Sensitivities: New Research Directions,” Working Paper at the Utah Winter Finance Conference, 2001.

[25] M. Jaffee and F. Modigliani, “A Theory and Test of Credit Rationing,” The American Economic Review, Vol. 59, No. 7, 1969, pp. 850-872.

[26] A. B. Abel, “Investment and the Value of Capital,” Garland, New-York, 1980.

[27] A. B. Abel and O. Blanchard, “The Present of Profit and Cyclical Movements in Investment,” Econometrica, Vol. 54, No. 2, 1986, pp. 249-273. doi:10.2307/1913150

[28] V. P. Azofra and F. J. Lopez, “Déterminants Financiers de l’Investissement en Capital Fixe: Le cas Espagnol,” Revue économie Industrielle, Vol. 86, No. 86, 1998, pp, 25-48.

[29] F. Jaramillo, F. Schiantarelli and A. Weiss, “Capital Market Imperfection before and after Financial Liberalisation: An Euler Equation Approach to Panel Data for Ecuadorian Firm,” Journal of Development Economics, Vol. 51, No. 2, 1996, pp. 367-386. doi:10.1016/S0304-3878(96)00420-8

[30] F. Rosenwald, “L’Impact des Conditions Financières sur la Décision d’Investissement,” économie et Prévisions, No. 1-2, 2001, pp. 341-342,

[31] M. Arellano and S. Bond, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” The Review of Economic Studies, Vol. 58, No. 2, 1991, pp. 277-297. doi:10.2307/2297968

[32] J. A. Hausman, “Specification Tests in Econometrics,” Econometrica, Vol. 46, No. 6, 1980, pp. 1251-1271. doi:10.2307/1913827

[33] Y. Ziane, “Nombre de Banques et Relation de Crédit, une étude Empirique,” Revue économique, Vol. 55, No. 3, 2004, pp. 415-428.

[34] A. Guariglia, “Internal Financial Constraints, External Constraints, and Investment Choice: Evidence from a Panel of UK Firms,” Journal of Management Finance, Vol. 32, No. 9, 2008, pp. 1795-1809.

[35] G. Hovakimian, “Determinants of Investment Cash-Flow Sensitivity,” Financial Mangement, Vol. 38, No. 6, 2009, pp. 161-183. doi:10.2307/1913827

[36] C. Hsiao and A. K. Tahmiscioglu, “A panel Analysis of Liquidity Constraints and Firm Investment,” Journal of the American Statistical Association, Vol. 92, 1997, pp. 455-465.

[1] A. Glesne and G. Legris, “La Décision d’Investissement des Grandes Sociétés Francaises une Approche Econométrique,” Revue économique, Vol. 25, No. 1, 1974, pp. 49-74.

[2] F. Modigliani and M. Miller, “The Cost of Capital, Corporate Finance, and the Theory of Investment,” American Economic Review, Vol. 48, No. 3, 1958, pp. 97-261.

[3] S. M. Fazzari, R. G. Hubbard and B. C. Peterson, “Financing Constraints and Corporate Investment,” Brookings Papers on Economic Activity, Vol. 1, No. 1, 1988, pp. 141-195. doi:10.2307/2534426

[4] R. Carpenter and A. Guariglia, “Cash Flow, Investment, and Investment Opportunities: New Tests Using UK Panel Data,” University of Nottingham Discussion Paper n 03/24, 2003.

[5] K. Gugler, D. C. Mueller and B. B. Yurtoglu, “Marginal q, Tobin’s q, Cash-Flow and Investment,” Southern Economic Journal, Vol. 70, No. 3, 2004, pp. 512-531. doi:10.2307/4135328

[6] A. Minton and C. Schrand, “The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing,” Journal of Financial Economics, Vol. 54, No. 3, 1999, pp. 423-460. doi:10.1016/S0304-405X(99)00042-2

[7] S. C. Vogt, “The Cash Flow/Investment Relationship: Evidence from U.S. Manufacturing g Firms,” Financial Management, Vol. 23, No. 2, 1994, pp. 3-20. doi:10.2307/3665735

[8] S. N. Kaplan and L. Zingales, “Do Financing Constraints Explain Why Investment is Correlated with Cash-Flow?” NBER Working Paper, N5267, 1995.

[9] A. Heitor and M. Campello, “Financial Constraints, Asset Tangibility, and Corporate Investment,” Review of Financial Studies, Vol. 20, No. 5, 2007, pp. 1429-1460. doi:10.1093/rfs/hhm019

[10] M. T. Whited, “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data,” Journal of Finance, Vol. 47, No. 4, 1992, pp. 1425-1460. doi:10.1111/j.1540-6261.1992.tb04664.x

[11] S. Bond and C. Meghir, “Dynamic Investment Models and the Firm’s Financial Policy,” Review of Economic Studies, Vol. 61, No. 2, 1994, pp. 197-222. doi:10.2307/2297978

[12] Y. Daoud and A. Kammoun, “Contraintes Financières et Comportement d’Investissement: Le cas des Entreprises Tunisiennes Cotées,” Revue Libanaise de Gestion et d’économie, Vol. 1, No. 5, 2011, pp. 1-33.

[13] S. N. Kaplan and L. Zingales, “Do Investment Cash-Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics, Vol. 115, No. 2, 1997, pp. 707-712. doi:10.1162/003355300554782

[14] S. Nivoix, J. Faouzzi and W. Saidani, “Sensibilité des Investissements aux Cash-Flows et Degré de Contrainte Financière des Firmes: Le cas des keiretsujaponais,” Working Paper, Université de Tunis, 2003.

[15] T. Tobin, “A General Equilibrium Approach to Monetary Theory,” Journal of Money, Vol. 1, No. 1, 1969, pp. 15-29. doi:10.2307/1991374

[16] E. Malinvaud, “Profitability and Unemployment,” Cambridge University Press, Cambridge, 1980.

[17] E. Malinvaud, “The Challenge of Macroeconomic Understanding,” BancoNazionale Del Lavoro Quarterly Review, Vol. 1, No. 162, 1987, pp. 219-238.

[18] F. Modigliani and M. Miller, “Some Estimates of the Cost of the Capital to the Electric Utility Industry, 1954-1957,” American Economic Review, Vol. 56, 1957, pp. 333-391.

[19] F. Hayashi, “Tobin’s Marginal q and Average q: a Neoclassical Interpretation,” Econometrica, Vol. 50, No. 1, 1982, pp. 213-224. doi:10.2307/1912538

[20] E. Malinvaud, “Econometric Methodology at the Cowles Commission: Rise and Maturity,” Econometric Theory, Vol. 4, No. 2, 1988, pp. 187-209. doi:10.1017/S0266466600012020

[21] M. Jensen, “Agency Cost of Free Cash-Flow, Corporate Finance, and Takeovers,” American Economic Review, Vol. 76, No. 2, 1986, pp. 323-329.

[22] M. Jensen and W. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics, Vol. 3, No. 4, 1976, pp. 305-360. doi:10.1016/0304-405X(76)90026-X

[23] L. Lang and R. Litzenberger, “Dividend Announcements: Cash Flow Signalling vs. Free Cash Flow Hypothesis,” Journal of Financial Economics, Vol. 24, No. 1, 1989, pp. 181-191. doi:10.1016/0304-405X(89)90077-9

[24] A. Heitor and M. Campello, “Financial Constraints and Investment-Cash Flow Sensitivities: New Research Directions,” Working Paper at the Utah Winter Finance Conference, 2001.

[25] M. Jaffee and F. Modigliani, “A Theory and Test of Credit Rationing,” The American Economic Review, Vol. 59, No. 7, 1969, pp. 850-872.

[26] A. B. Abel, “Investment and the Value of Capital,” Garland, New-York, 1980.

[27] A. B. Abel and O. Blanchard, “The Present of Profit and Cyclical Movements in Investment,” Econometrica, Vol. 54, No. 2, 1986, pp. 249-273. doi:10.2307/1913150

[28] V. P. Azofra and F. J. Lopez, “Déterminants Financiers de l’Investissement en Capital Fixe: Le cas Espagnol,” Revue économie Industrielle, Vol. 86, No. 86, 1998, pp, 25-48.

[29] F. Jaramillo, F. Schiantarelli and A. Weiss, “Capital Market Imperfection before and after Financial Liberalisation: An Euler Equation Approach to Panel Data for Ecuadorian Firm,” Journal of Development Economics, Vol. 51, No. 2, 1996, pp. 367-386. doi:10.1016/S0304-3878(96)00420-8

[30] F. Rosenwald, “L’Impact des Conditions Financières sur la Décision d’Investissement,” économie et Prévisions, No. 1-2, 2001, pp. 341-342,

[31] M. Arellano and S. Bond, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” The Review of Economic Studies, Vol. 58, No. 2, 1991, pp. 277-297. doi:10.2307/2297968

[32] J. A. Hausman, “Specification Tests in Econometrics,” Econometrica, Vol. 46, No. 6, 1980, pp. 1251-1271. doi:10.2307/1913827

[33] Y. Ziane, “Nombre de Banques et Relation de Crédit, une étude Empirique,” Revue économique, Vol. 55, No. 3, 2004, pp. 415-428.

[34] A. Guariglia, “Internal Financial Constraints, External Constraints, and Investment Choice: Evidence from a Panel of UK Firms,” Journal of Management Finance, Vol. 32, No. 9, 2008, pp. 1795-1809.

[35] G. Hovakimian, “Determinants of Investment Cash-Flow Sensitivity,” Financial Mangement, Vol. 38, No. 6, 2009, pp. 161-183. doi:10.2307/1913827

[36] C. Hsiao and A. K. Tahmiscioglu, “A panel Analysis of Liquidity Constraints and Firm Investment,” Journal of the American Statistical Association, Vol. 92, 1997, pp. 455-465.