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On the basis of principal-agent and financing constraints theories, the purpose of this paper is to construct a unified research framework via mathematical models and to provide a logical and consistent explanation of the contradictory discovery of the relationship between dividend payment and I-CFO in the previous literature.

Establishing the economic mathematical models, this paper uses the comparative static analysis to figure out the equilibrium results, to further testify the conclusions, the authors initiate the empirical tests to make the discussion more realistic.

The authors observe that overinvestment caused by agency problems is the primary reason for I-C sensitivity when the investment expenditure is less than the internal capital; dividend payout suppresses the overinvestment caused by the agency problem, thus alleviating the investment’s dependence on the internal capital. However, underinvestment caused by the financing constraints is the primary cause of I-C sensitivity when the investment expenditure is greater than the internal capital. The payment of cash dividends increases the investment shortage caused by the financing constraints, thus increasing the sensitivity. Further, the authors explore the impact of dividend payments on I-CFO sensitivity. They argue that dividend payment is not an appropriate measure of financing constraints. Both I-CFO sensitivity and I-C sensitivity are functions of agency cost and information cost.

This study provides a logical and consistent explanation of the contradictory discovery of the relationship between dividend payment and I-CFO in the previous literature and provides a clear framework and reference for future studies on the impact of financial constraints, agency cost on the investment’s dependence on the internal capital.

The theoretical model of this paper supports this differentiated mandatory dividend policy and provides reference and evidence for China's financing policies and dividend distribution policies.

This study theoretically and empirically analyzes and verifies the roles of agency cost and financial constraints on the determinants of I-C sensitivity for the first time. First, different from earlier literature, this paper puts forward I-C sensitivity as a new measure of investment’s dependence on internal capital, making the measurement more accurate. In the case of a firm with positive liquidity reserves, using the I-CFO sensitivity as a measure of external financing constraints could overestimate the firm’s financial constraints. Second, by constructing an economic static analysis framework, this study analyzes how I-C and I-CFO sensitivities change with the agency cost, the financing constraints and the dividend payment ratio. The research provides a basic framework and explanation on the contradictions of the earlier literature. The results are supposed to serve as a foundation for estimations of investment’s dependence on internal capital and should be embedded in general empirical tests in future research.

The purpose of this paper is to analyze and examine the role of accounting conservatism on firm investment behavior in China.

By combining a developed theoretical framework and empirical study, this paper examines the impacts of accounting conservatism on firm investment. The sample and data are all collected from Wind and CAMAR databases.

The paper finds that the association between accounting conservatism and capital expenditure is significantly positive when inside capital is not enough to use for investment, suggesting that conservatism can expend the level of investment by decreasing information asymmetry and cost of capital; however, the association between accounting conservatism and capital expenditure is significantly negative when inside capital is enough to use for investment, suggesting that conservatism can curtail the level of investment by mitigating the interest conflicts between management and outside shareholders and decreasing agency costs. Additionally, the paper finds that the severity of information asymmetry and agency problem affects the role of accounting conservatism on firm investment behaviour, and the association between accounting conservatism and capital expenditure is weaker for firms with ultimate ownership controller as local government or individuals.

This is the first paper to analyze and examine the impacts of accounting conservatism on firm investment in China directly. The findings are also useful to explain the awkward predicament found by prior literature.

The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints.

This study uses large panel sample of Chinese listed firms over the period 2005–2015 using system generalized method of moments (GMM) estimator that controls unobserved heterogeneity of individual firms well and GMM methodology is robust to address endogeneity issues.

Empirical evidence finds inverted U-shaped relationship between working capital and corporate performance and exhibits similar evidence for financially constrained firms. Evidence shows impact of high sales and discounts on early payments at low level of working capital and dominance of opportunity cost and cost of external finance at high level of working capital. The findings of the results show that optimal working capital level of financially constrained firms is relatively lower due to high cost of external capital and debt rationing. The results also indicate that on average NET is significantly lower for firms with Tobin’s Q>1 than firms with Tobin’s Q=1, and suggest that aggressive working capital management is significantly and positively associated with higher corporate values.

This paper is among few that complement the existing literature by providing evidence that inverted U-shaped relationship between working capital management and corporate performance also exists in the context of Chinese listed non-financial firms. Exclusively, the relationship of working capital and corporate performance with linkage of financial constraints is scant in the context of Chinese listed non-financial firms.

The purpose of this paper is to examine the impact of working capital management (WCM) on profitability under different financial conditions (constraint/unconstraint) and WCM policy (aggressive/conservative). Furthermore, the study investigates the existence of optimal working capital levels under different financial conditions and WCM policy.

Two-step system generalized method of moments and fixed effect models are used to analyze the data collected from Prowess database from 2011 to 2020 for a sample of 1,104 Indian manufacturing companies.

The study finds an inverted U-shaped relationship between working capital and profitability in all financial conditions and working capital policy. This finding advocates the existence of an optimal level of working capital that equates the costs and benefits of holding working capital to maximize the companies’ profitability. However, holding working capital beyond the optimal level negatively affects profitability. Companies under financial constraints with aggressive working capital policies have the lowest optimal cash conversion cycle (CCC). Furthermore, the relationship of working capital with profitability and the optimal CCC varies owing to firm age and industry group.

To the best of the authors’ knowledge, this is the first paper that incorporates the impact of working capital on firm’s performance from both financial constraint (unconstraint) and aggressive (conservative) working capital policy perspectives in the Indian context. Furthermore, this study also contributes in terms of reflecting the effect of firm age and industry in determining the optimum CCC of the firms.

The purpose of this paper is to analyse if capital structure decisions of small- and medium-sized Portuguese firms are in accordance with the predictions of dynamic trade-off theory, more precisely, the speed of adjustment of short-term debt (STD) and long-term debt (LTD) towards the respective target debt ratios.

Based on two samples of Portuguese firms, 1,377 small-sized firms and 811 medium-sized firms, dynamic estimators were used for the treatment of data obtained from the Amadeus database for the period 2007-2011.

The results indicate that small- and medium-sized firms adjust their STD and LTD ratios towards the respective target ratios. Small- and medium-sized firms present a high-speed adjustment towards the target STD ratio, suggesting that both types of firm face costs of deviating from the target capital structure, which are, probably, greater than the costs of adjustment associated with STD. However, considering the distance from the target ratio as a determinant of the adjustment speed, the results show the predominance of the negative effect of the costs of adjustment on capital structure adjustment speeds.

The results obtained for the speed of adjustment of STD and LTD, in a recession context, show that for small firms and medium-sized firms, mainly for the former, the costs of external market transactions are prohibitively high, slowing the speed of adjustment towards the target capital structure.

This paper aims to revisit the assumption of the cyclicality of the property-liability insurance market and identify a scenario in which the so-called underwriting cycles are unpredictable, according to a dynamic cash flow model which generates non-cyclical output dynamics.

This paper is on the intersection of real business cycle models and financial cycles. The authors construct a dynamic model of an insurer’s cash flows with stochastic loss shocks and capacity constraints, in which loss shocks have a dual impact on both underwriting profits and access to external capital. They simulate the insurer’s optimal output responses to loss shocks, including output movements in underwriting coverage and external capital, to explore the source of unpredictable underwriting cycles through linear quadratic approximation in the model economy.

The authors find that the effect of loss shocks on the insurer’s cash flows could spread out and amplify over time because of the dynamic interaction between its underwriting capability and ability to raise external capital. This dynamic interaction can generate a non-cyclical pattern of changes in underwriting coverage and access to external capital in the benchmark economy. Applied to different experimental economies, the simulation results reveal that the determinants of the level of output fluctuations include the size of loss shocks, the sensitivity of capital market to loss shocks and the tightness of capital market.

To the best of the authors’ knowledge, there has been no attempt to study insurance output cyclicality with a dynamic cash flow model based upon the real business cycle literature, in which the dynamic interaction between underwriting and access to external capital because of loss shocks has an amplifying effect on output markets. This paper contributes to the current body of research by being able to simulate and show the insurance output dynamics resulting from the amplifying effect under capacity constraints.

The purpose of this paper is to provide a unified theoretical framework that explains farm capital structure choice.

The framework accommodates different credit access scenarios and heterogeneous risk profiles of borrowers. It recognizes that the costs of capital are endogenously determined, reflecting the degree of credit risk and accessibility to credit markets. Based on the proposed model and the comparative statics derived thereof, the paper empirically tests the impacts of different factors on capital structure choice.

Based on the theoretical framework, the paper derived the impacts of different factors on capital structure choice using comparative statics. Results suggest that the potential determinants of capital structure have varying effects at different ranges of leverage. Empirical evidence supports the theoretical model.

Despite all of previous work on various aspects of farm capital structure choice, a framework that encompasses each of the different assumptions and scenarios is still lacking. The theoretical model integrates credit risk models and accommodates endogenous cost of capital, providing a comprehensive framework for studying farm capital structure choice and its determinants. The results provide insights that could help policy makers and lenders develop effective instruments to manage, monitor, and influence the financial leverage of farms at different quantiles of debt ratio.

This study aims to investigate the influence of macroeconomic conditions on corporate cash holdings in terms of their influence on the level of cash and the speed of adjustment of cash to target levels in the Gulf Cooperation Council countries (GCC).

The study employs both static and dynamic regression analyses considering a sample of 2,878 firm-year observations drawn from stock markets in GCC countries over the 2010–2018 period.

Consistent with the precautionary motive, the results show that GCC firms tend to accumulate cash reserves in weak economic periods. Evidence also reveals that the estimated adjustment coefficients from dynamic panel models show that GCC firms adjust more slowly toward their target cash ratio in periods of unfavorable economic conditions.

This study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering financial constraints imposed by macroeconomic conditions. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of macroeconomic factors on firm's cash holding decision. Therefore, in an effort to increase the supply of external financing available to firms, policymakers may devise investment friendly environment by controlling macroeconomic factors.

This paper offers some insights on the macro determinants of cash holdings by investigating emerging economies. It explores the role of macroeconomic conditions on corporate cash holdings in terms of their influence on the costs of external funds and financial constraints.

The purpose of this paper is to examine how managers of African firms, operating in environments characterised by less developed capital markets and weak institutional structures, make use of their internally generated cash flows.

The authors use a panel data methodology which regresses a particular use of cash flow (e.g. capital expenditure) on the internally generated operating cash flow of a firm and a set of control variables. The estimation of the regression model is done by ordinary least squares regressions. For robustness, the authors also estimate the models using system generalised method of moments to control for endogeneity and measurement error problems.

The authors find that managers of African firms hold most of their internally generated cash flows, and when they decide to spend, they allocate a higher proportion towards dividend payments; followed by debt adjustments; then to investments; and lastly, to equity repurchases.

The findings are consistent with the existence of a significant financial constraint in African markets, and the use of dividends to signal credit quality in relatively underdeveloped capital markets.

The authors provide a more extensive analysis of how a firm spends a unit of the incremental cash flow it generates. In particular, the analysis shows that beyond investments in capital expenditure, other cash flow uses (i.e. cash holdings, dividend payments, and adjustments in debt and equity capital) which have been largely overlooked in the literature are important to understanding the effects of financial constraints on corporate decisions. Also, the early empirical evidence on the cash flow allocations of African firms could be a step in the right direction in informing theory development in this area.

This study aims to investigate the influence of economic policy uncertainty (EPU) and geopolitical risk (GPR) on the relationship between internal cash flow and external financing in an emerging market, Saudi Arabia. It also examines the role of asset tangibility and financial crisis in establishing this relationship.

The sample was taken from non-financial sector companies listed on the Saudi Stock Exchange between 2002 and 2019. The data were analyzed using panel data regression analysis, including ordinary least squares and fixed effects model. The author addresses potential endogeneity through the generalized method of moments.

This study found that both EPU and GPR reduce the sensitivity of external financing to internal cash flow. This implies that firms depend more on internally generated funds during periods of increased EPU and GPR. Besides, this study found that the influence of EPU and GPR on the sensitivity of external financing to internal cash flow is more (less) negative for more tangible firms (during the financial crisis period). This result implies that Saudi firms boasting a higher level of tangibility are more flexible when it comes to seeking external financing. However, the presence of uncertainty during the crisis period makes the external financing costly, and therefore, firms will be less likely to raise funds from external sources.

This study has important implications for managers, policymakers and regulators. First, the paper findings provide insights for corporate decision-makers in helping them to focus on internal funds to finance their investment during uncertain times. Second, the findings help managers to understand the role of asset tangibility in raising external funding when firms face financial constraints due to uncertainty. Third, this study also helps corporates to focus on internal funds to finance their investment during the crisis period because EPU and GPR increase the cost of external finance. Finally, the results provide guidelines for policymakers and regulators to make appropriate policy measures to increase the easy availability of external finance during periods of increased EPU and GPR.

This paper is the first to shed light on the impact of internal funds on external financing while paying close attention to the role of EPU and GPR.