Financial constraints, asset tangibility, and corporate investment

Heitor Almeida, Murillo Campello

Research output: Contribution to journalArticle

Abstract

Pledgeable assets support more borrowing, which allows for further investment in pledgeable assets. We use this credit multiplier to identify the impact of financing frictions on corporate investment. The multiplier suggests that investmentcash flow sensitivities should be increasing in the tangibility of firms assets (a proxy for pledgeability), but only if firms are financially constrained. Our empirical results confirm this theoretical prediction. Our approach is not subject to the Kaplan and Zingales (1997) critique, and sidesteps problems stemming from unobservable variation in investment opportunities. Thus, our results strongly suggest that financing frictions affect investment decisions.

Original languageEnglish (US)
Pages (from-to)1429-1460
Number of pages32
JournalReview of Financial Studies
Volume20
Issue number5
DOIs
StatePublished - Sep 14 2007
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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