Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt
This paper examines the sensitivity of investment to cash flow in declining economic conditions, focusing on the impact of a firm’s reliance on bank debt. Using the context of Jordan, a developing Middle East and North Africa (MENA) country, the study utilizes the standard Q theory of investment aug...
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| Format: | Article |
| Language: | English |
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MDPI AG
2022-11-01
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| Series: | Economies |
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| Online Access: | https://www.mdpi.com/2227-7099/10/11/288 |
| _version_ | 1797465540085678080 |
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| author | Ghada Tayem |
| author_facet | Ghada Tayem |
| author_sort | Ghada Tayem |
| collection | DOAJ |
| description | This paper examines the sensitivity of investment to cash flow in declining economic conditions, focusing on the impact of a firm’s reliance on bank debt. Using the context of Jordan, a developing Middle East and North Africa (MENA) country, the study utilizes the standard Q theory of investment augmented by cash flow, leverage, and liquidity. Then, it allows for differential loading on the cash flow coefficient pre- and post-2008, the year that marks the beginning of declining conditions, and by categorizing companies based on their reliance on bank debt, measured by having access to a bank line of credit. Using alternative estimation specifications, the findings indicate that firms’ investments decreased significantly in episodes of declining conditions. In addition, the findings indicate that firms’ investments exhibited more sensitivity to cash flow during declining conditions, especially for firms with access to lines of credit. The latter finding suggests that firms reliant on bank debt could not compensate for the credit shortages by switching to other sources of external funding and therefore they were compelled to use more of their internally generated funds to finance their investments. |
| first_indexed | 2024-03-09T18:23:55Z |
| format | Article |
| id | doaj.art-df9dda9b0c2f4fb2bf12423f2fe691fe |
| institution | Directory Open Access Journal |
| issn | 2227-7099 |
| language | English |
| last_indexed | 2024-03-09T18:23:55Z |
| publishDate | 2022-11-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Economies |
| spelling | doaj.art-df9dda9b0c2f4fb2bf12423f2fe691fe2023-11-24T08:07:11ZengMDPI AGEconomies2227-70992022-11-01101128810.3390/economies10110288Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank DebtGhada Tayem0The Department of Finance, The University of Jordan, Amman 11942, JordanThis paper examines the sensitivity of investment to cash flow in declining economic conditions, focusing on the impact of a firm’s reliance on bank debt. Using the context of Jordan, a developing Middle East and North Africa (MENA) country, the study utilizes the standard Q theory of investment augmented by cash flow, leverage, and liquidity. Then, it allows for differential loading on the cash flow coefficient pre- and post-2008, the year that marks the beginning of declining conditions, and by categorizing companies based on their reliance on bank debt, measured by having access to a bank line of credit. Using alternative estimation specifications, the findings indicate that firms’ investments decreased significantly in episodes of declining conditions. In addition, the findings indicate that firms’ investments exhibited more sensitivity to cash flow during declining conditions, especially for firms with access to lines of credit. The latter finding suggests that firms reliant on bank debt could not compensate for the credit shortages by switching to other sources of external funding and therefore they were compelled to use more of their internally generated funds to finance their investments.https://www.mdpi.com/2227-7099/10/11/288investment-cash flow sensitivitycredit constraintslines of crediteconomic policy uncertaintydeveloping marketsMENA |
| spellingShingle | Ghada Tayem Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt Economies investment-cash flow sensitivity credit constraints lines of credit economic policy uncertainty developing markets MENA |
| title | Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt |
| title_full | Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt |
| title_fullStr | Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt |
| title_full_unstemmed | Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt |
| title_short | Credit Constraints and Investment-Cash Flow Sensitivity in Declining Economic Conditions: The Role of Reliance on Bank Debt |
| title_sort | credit constraints and investment cash flow sensitivity in declining economic conditions the role of reliance on bank debt |
| topic | investment-cash flow sensitivity credit constraints lines of credit economic policy uncertainty developing markets MENA |
| url | https://www.mdpi.com/2227-7099/10/11/288 |
| work_keys_str_mv | AT ghadatayem creditconstraintsandinvestmentcashflowsensitivityindecliningeconomicconditionstheroleofrelianceonbankdebt |