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Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales
- Journal of Money, Credit, and Banking
- The Ohio State University Press
- Volume 38, Number 2, March 2006
- pp. 357-374
- 10.1353/mcb.2006.0034
- Article
- Additional Information
We examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales. Asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities. The cross-sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation. We find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained.