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Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data
Author(s) -
WHITED TONI M.
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04664.x
Subject(s) - investment (military) , debt , economics , constraint (computer aided design) , market liquidity , econometrics , euler equations , simultaneous equations model , a priori and a posteriori , liquidity constraint , panel data , structural equation modeling , sample (material) , dispersion (optics) , monetary economics , mathematics , finance , statistics , chromatography , politics , political science , law , mathematical analysis , philosophy , chemistry , geometry , physics , optics , epistemology
This paper presents evidence supporting the theory that problems of asymmetric information in debt markets affect financially unhealthy firms' ability to obtain outside finance and, consequently, their allocation of real investment expenditure over time. I test this hypothesis by estimating the Euler equation of an optimizing model of investment. Including the effect of a debt constraint greatly improves the Euler equation's performance in comparison to the standard specification. When the sample is split on the basis of two measures of financial distress, the standard Euler equation fits well for the a priori unconstrained groups, but is rejected for the others.