Corporate investiments and financing coonstraints:a new research strategy using a flexible modelling approach

Abstract

The thesis consists of three main parts, divided into seven chapters. Part 1 wants to make a methodological contribution by critically reviewing the existing framework and introducing the new research strategy. The first chapter provides a literature review with specific attention to the debate in the empirical literature on the usefulness of the investment-cash flow sensitivity as a measure of financing constraints. In chapter 2, we explore the existing methodological operationalization and unravel several shortcomings and limitations of the current approach. In the third chapter, we introduce the new research strategy in a theoretical manner, and emphasize its potentials and benefits in addressing the observed shortcomings of the traditional framework. Part 2, which consists of four chapters, gives an overview of different empirical exercises that have been carried out in order to illustrate the framework in 11different settings and to address the research question advanced in the previous section. In chapter 4 we illustrate the framework in the context of a static Q model of investment for a sample of US-based listed firms. Chapter 5 provides an empirical application in the context of a dynamic neoclassical investment model for a sample of Belgian unlisted firms. Chapter 6 illustrates how the framework can be used in the context of model-selection by comparing two models that differ in their control for the investment opportunities bias in the context of Belgian unlisted firms. Finally, in chapter 7, we apply the framework to a very recent development in the literature i.e. the evaluation of cash-cash flow sensitivities. Note that all empirical exercises can be read as separate applications of the research strategy in different contexts. Therefore, the empirical exercises can be switched or skipped at the reader’s choice. Although we believe that each application has its own contributions by focussing on a particular problem in the literature, some overlap between the empirical chapters is inevitable. Part three presents a discussion of the main findings with respect to the central research question and the main contributions to the literature. We also examine the limitations of the research and advance potential new routes for further research. The thesis ends with an appendix on entropy econometrics which is the econometrical technique used to bring the new framework into practice. We wish everybody an interesting reading.