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RFS Advance Access originally published online on April 12, 2007
Review of Financial Studies 2007 20(5):1429-1460; doi:10.1093/rfs/hhm019
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Right arrow G31 - Capital Budgeting; Fixed Investment and Inventory Studies
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Financial Constraints, Asset Tangibility, and Corporate Investment

Heitor Almeida
New York University and NBER

Murillo Campello
University of Illinois Urbana-Champaign, and NBER

Address correspondence to Murillo Campello, Wohlers Hall 430-A, 1206 South Sixth Street, Champaign, IL 61820, USA, or e-mail: campello{at}uiuc.edu

JEL: G31


  Abstract

Pledgeable assets support more borrowing, which allows for further investment in pledgeable assets. We use this credit multiplier to identify the impact of financing frictions on corporate investment. The multiplier suggests that investment–cash flow sensitivities should be increasing in the tangibility of firms' assets (a proxy for pledgeability), but only if firms are financially constrained. Our empirical results confirm this theoretical prediction. Our approach is not subject to the Kaplan and Zingales (1997) critique, and sidesteps problems stemming from unobservable variation in investment opportunities. Thus, our results strongly suggest that financing frictions affect investment decisions.

We thank Matias Braun, Charlie Calomiris, Glenn Hubbard (NBER discussant), Owen Lamont, Anthony Lynch, Bob McDonald (the editor), Eli Ofek, Leonardo Rezende, David Scharfstein, Rodrigo Soares, Sheri Tice, Greg Udell, Belén Villalonga (AFA discussant), Daniel Wolfenzon, and an anonymous referee for their suggestions. Comments from seminar participants at the AFA meetings (2005), Baruch College, FGV-Rio, Indiana University, NBER Summer Institute (2003), New York University, and Yale University are also appreciated. Joongho Han provided support with GAUSS programming. Patrick Kelly and Sherlyn Lim assisted us with the Census data collection. All remaining errors are our own.


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