Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms
Abstract This paper uses a large panel of Pakistani non-financial firms over the period 2000–2013 to examine the role of financial constraints in establishing the relationship between cash flow and external financing. The results reveal that there exists a negative and significant relationship betwe...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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SpringerOpen
2018-07-01
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| Series: | Financial Innovation |
| Subjects: | |
| Online Access: | http://link.springer.com/article/10.1186/s40854-018-0100-6 |
| _version_ | 1818560357486034944 |
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| author | Abdul Rashid Noshaba Jabeen |
| author_facet | Abdul Rashid Noshaba Jabeen |
| author_sort | Abdul Rashid |
| collection | DOAJ |
| description | Abstract This paper uses a large panel of Pakistani non-financial firms over the period 2000–2013 to examine the role of financial constraints in establishing the relationship between cash flow and external financing. The results reveal that there exists a negative and significant relationship between external financing and cash flow. The finding of the substitutionary relation between internal funds availability and external financing has been viewed as evidence supporting the pecking order theory of capital structure. Yet, we show that this negative relationship is weak in case of financially constrained firms. We also analyze how credit multiplier affects external financing decisions of financially constrained and unconstrained firms. The results show that for financially unconstrained firms, the negative sensitively of external financing increases with asset tangibility. However, for financially constrained firms, the negative sensitivity of external financing to cash flow either decreases or turns positive as the tangibility of assets increases. This finding implies that financially constrained firms benefit more from investing in tangible assets because such assets not only help relax financial constraints but also having a potential to be a direct source of funds in periods of negative cash flow shocks. |
| first_indexed | 2024-12-14T00:37:28Z |
| format | Article |
| id | doaj.art-50eb75b5bf5d4f16a6a932d9b922bce4 |
| institution | Directory Open Access Journal |
| issn | 2199-4730 |
| language | English |
| last_indexed | 2024-12-14T00:37:28Z |
| publishDate | 2018-07-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj.art-50eb75b5bf5d4f16a6a932d9b922bce42022-12-21T23:24:34ZengSpringerOpenFinancial Innovation2199-47302018-07-014112010.1186/s40854-018-0100-6Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firmsAbdul Rashid0Noshaba Jabeen1International Institute of Islamic Economics (IIIE), International Islamic University (IIU)International Institute of Islamic Economics (IIIE), International Islamic University (IIU)Abstract This paper uses a large panel of Pakistani non-financial firms over the period 2000–2013 to examine the role of financial constraints in establishing the relationship between cash flow and external financing. The results reveal that there exists a negative and significant relationship between external financing and cash flow. The finding of the substitutionary relation between internal funds availability and external financing has been viewed as evidence supporting the pecking order theory of capital structure. Yet, we show that this negative relationship is weak in case of financially constrained firms. We also analyze how credit multiplier affects external financing decisions of financially constrained and unconstrained firms. The results show that for financially unconstrained firms, the negative sensitively of external financing increases with asset tangibility. However, for financially constrained firms, the negative sensitivity of external financing to cash flow either decreases or turns positive as the tangibility of assets increases. This finding implies that financially constrained firms benefit more from investing in tangible assets because such assets not only help relax financial constraints but also having a potential to be a direct source of funds in periods of negative cash flow shocks.http://link.springer.com/article/10.1186/s40854-018-0100-6External financingCash flowsInternally generated fundsFinancial constraintsInvestmentCredit multiplier |
| spellingShingle | Abdul Rashid Noshaba Jabeen Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms Financial Innovation External financing Cash flows Internally generated funds Financial constraints Investment Credit multiplier |
| title | Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms |
| title_full | Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms |
| title_fullStr | Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms |
| title_full_unstemmed | Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms |
| title_short | Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms |
| title_sort | financial frictions and the cash flow external financing sensitivity evidence from a panel of pakistani firms |
| topic | External financing Cash flows Internally generated funds Financial constraints Investment Credit multiplier |
| url | http://link.springer.com/article/10.1186/s40854-018-0100-6 |
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