Ameer, Rashid
(2014)
Financial Constraints, Debt Overhang And
Corporate Investment: A Panel Smooth
Transition Regression Approach.
Asian Academy of Management Journal of Accounting and Finance, 10 (2).
pp. 1-26.
ISSN 1823-4992
Abstract
This paper provides new evidence on the impacts of financial constraints, growth
opportunities and debt overhang on firm-level investments in 12 Asian countries,
Australia and New Zealand over the period 1990–2010. Using Panel Smooth Transition
Regression (PSTR) models that overcome the shortcomings of linear investment models,
we show that the PSTR models have greater explanatory power than linear models. The
empirical results show that for firms with growth opportunities, (1) investment is sensitive
to the availability of internal finance and (2) debt overhang reduces investment by firms
with higher leverage through a 'liquidity' effect. Our findings imply that the managers of
financially constrained firms in developed countries in the Asian region respond
differently to productivity shocks and growth opportunities than financially constrained
firms in emerging markets and developing countries. In addition, in emerging Asian
economies, higher equity valuations increased firm-level investment after the stock
markets opened to foreign investors. Accordingly, policy makers should review their
liberalisation measures and seek to understand the mechanisms at work in order to
bolster international investors' confidence and stimulate foreign investment.
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