The firm's financing constraints and the investment cash flow sensitivity: An intertemporal pattern
The essence of the financing constraints theory, dubbed the investment-cash flow sensitivity, had spawned a plethora of research agendas and hot debates to explain it away. Although there is scathing criticism about its usefulness, it is still used to gauge financing constraints. In this paper, we interpret constraints from an intertemporal perspective. Using the investor's participation constraint, we derive a deterministic, linear relation between the sensitivities at subsequent dates. Our major theoretical result corroborates the fact that the worsening of the financial contractibility terms increases the investment's dependence on net worth of the company. Further, beyond a given threshold value of the parsimonious proxy capturing the informational problems, the company will be more financially constrained in the subsequent period. That result confirms the role of the net worth in driving the firm's investment in the context of incentive problems that bring forth binding financing constraints.