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This paper aims to investigate the impact of capital market imperfections on corporate investment. First, the paper constructs two synthetical indices that reflect the degree of financing constraints faced by Chinese listed companies, using Logistic Regression Model and Multiple Discriminant Analysis respectively. Second, the paper examines the relationship between financing constraints and the investment-cash flow sensitivity using OLS regressions. Empirical results show that corporate investments are sensitive to internally generated cash flows for all listed companies, but additional evidence shows that the investment-cash flow sensitivity of more financially constrained companies is significantly higher than that of less financially constrained companies. This paper provides evidence that the relationship between financing constraints and investment-cash flow sensitivity is monotonic, which is consistent with the findings of FHP(1988). |
