BUSINESS GROUP AFFILIATION AND FINANCIAL CONSTRAINTS: INVESTMENT-CASH FLOW SENSITIVITY OF TURKISH BUSINESS GROUPS

Year 2015, Volume: 2 Issue: 3, 0 - 0, 29.09.2015

Emin Huseyin Cetenak Gamze Vural

Abstract

In the imperfect capital markets, the cost of external funds is greater than the cost of internal funds because of asymmetric information problems. Therefore, in these markets investment behavior largely depends on the ability of the firms’ internal funds generation.  This excess cost and unavailability of external funds indicate financial constraints. Investments of the firms with financial constraints depend on availability of internal funds. In this context, in the literature the investment-cash flow sensitivity of a company also signalize the degree of the company's financial constraints. In this paper, we examine investment-cash flow sensitivity of the Borsa Istanbul manufacturing firms by considering affiliation with business groups. We divide our sample into four subsamples. We find insignificant investment-cash flow relationship for the firms affiliated with a major business groups and firms which have more than %15 foreign shareholders. On the other hand we find strong investment-cash flow sensitivity for the small business groups affiliated firms and non-affiliated independent firms.

Keywords

Investments, cash flows, financing constraints, business groups, Turkey

References

• Aggarwal, R., Zong, S. (2006), The cash flow-investment relationship: International evidence of limited Access to external finance Journal of Multinational Financial Management 16, 89-104.
• Ağca, S., Mozumdar, A. (2008), The Impact of Capital Market Imperfections on Investment-Cash Flow Sensitivity,
• Journal of Banking and Finance 32, 207-216
• Alti, Aydogan, (2003), How sensitive is investment to cash flow when financing is frictionless? Journal of Finance 58, 707–722.
• Arellano, M., & Bond, S. (1991), Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297.
• Arellano, M., & Bover, O. (1995), Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
• Arslan, Ö., Chrisostomos, F., Ozkan, A. (2006), The role of cash holdings in reducing investment-cash flow sensitivity: Evidence from a financial crisis period in an emerging market Emerging Market Review 7, 320-338
• Beck T., Demirgüç-Kunt A., Laeven,L., Maksimovic, V. (2006), The determinants of financing obstacles Journal of
• International Money and Finance, 25, 932-952
• Bhaumik S.K., Das, P.K., Kumbhakar, S.C. (2012), A stochastic frontier approach to modelling financial constraints in firms: An application to India Journal of Banking & Finance,36, 1311–1319
• Bond S., Elston, J., Mairesse, J., Mulkay, B. (2003), Financial factors an investment in Belgium, France, Germany and the UK: a comparison using company panel data Review of Economics and Statistic 13, 153-165
• Bond S., Klemm,R., Newton-Smith,A., Syed,R.M., Vlieghe, G. W. (2004), The roles of expected profitability,
• Tobin's Q and cash flow in econometric models of company investment. Brainard, W., Tobin, J. (1968), Pitfalls in financial model building, American Economic Review, Vol. 58(2), 99-122.
• Chen H., Chen,S. (2011), Investment-cash flow sensitivity cannot be a good measure of financial constraints:
• Evidence from the time series Journal of Financial Economics 103, 393-410. Choi, Y.R., Yoshikawa,T., Zahra,S.A., Han, B.H. (2014), Market-oriented institutional change and R&D investments:
• Do business Groups enhance advantage? Journal of World Business, 49, 466-475
• Chrinko, R., Schaller, J. (1995), Why does liquidity matter in investment equations?, Journal of Money, Credit and Banking, 27, 527- 548.
• Clearly S., Povel, P., Raith, M. (2007), The U-shaped investment curve: Theory and evidence Journal of Financal and Quantitative Analaysis 42 (1), 1-40.
• Cleary, S. (1999), The relationship between firm investment and financial status Journal of Finance 54, 673-692
• Çetenak, H. (2012), İşletme Grubu İlişkisinin Firma Performansına Etkisi: İMKB’deBir Uygulama, Yayınlanmamış
• Doktora Tezi, Çukurova Üniversitesi, Adana Deloof, M. (1998), Internal capital markets, bank borrowing and finanancing constraints: evidence from Belgian firms Journal of Business Finance and Accounting, 25, 945-968
• Egimbaeva, B. (2013), Corporate Investment And Cash Flow Sensitivity: Evidence From Turkey, Yayınlanmamış
• Yüksek Lisans Tezi, Dokuz Eylül Üniversitesi, İzmir Erickson, T., Whited, T. M. (2000), Measurement error and the relationship between investment and q. Journal of political economy, 108(5), 1027-1057.
• Fazzari S.M., Hubbard,R.G., Peterson, B.C. (1988), Financing constraints and Measurement error and the relationship between investment and q corporate investment Brookings Papers on Economic Activity 1, 141-195
• Gallego, F., Loayza, N. (2001), Financial structure in Chile: macroeconomic developments and microeconomic effects. Financial structure and economic growth: A cross-country comparison of banks, markets, and development, 299-346.
• Geizici, A. (2009), Financial Liberalization and Financing Constraints: Investment in the Turkish Manufacturing Sector, Econanadolu
• Gomes, J.( 2001), Financing Investment American Ecomic Review, 91, 1263-1285
• Gorodnichenko, Y., Schaefer, D., Talavera, O. (2009), Financial constraints and continental business groups:Evidence from German Konzerns Research in International Business and Financ, 23, 233-242
• Gopalana R., Nanda, V., Seru, A. (2007), Affiliated firms and financial support: Evidence from Indian business groups Journal of Financial Economics 86, 759–795
• George, R., Kabir, R., Qian, J. (2011), Investment-cash flow sensitivity and Financing constraints: New evidence from Indian business group firms Journal of Multinational Financial Management 21, 69-88
• Hayashi, F (1982), Tobin’s average q and marginal q: a neoclassical interpretation’, Econometrica, Vol. 50, 213-24
• He J., Mao, X., Rui, O.M., Zha, X. (2013), Business Group in China Journal of Corporate Finance, 22, 166-192
• Hill, C.W.L. (1988), Internal capital market controls and financal performance in multidivisional firms. The Journal of Industrial Economics. C.37, No:1. 67-83.
• Hoshi, T., Kashyap, A., Scharfstein D.(1991), Corporate structure, Liquidity, and Investment: Evidence from
• Japanese Industrial Groups The Quarterly Journal of Economics, 106 (1), 33-60. Hubbard, R. G. (1997),Capital-market imperfections and investment (No. w5996), National Bureau of Economic Research.
• Hubbard, R.G., Kashyap, A.K., Whited T.M. (1995), Internal Finance and Firm Investment. Journal of Money,
• Credit and Banking, Volume 27, Issue 3, 683-701. Islam, S. S., Mozumdar, A. (2007), Financial market development and the importance of internal cash: Evidence from international data. Journal of Banking & Finance, 31(3), 641-658.
• Islam, S. S., Mozumdar, A. (2007), Financial market development and the importance of internal cash: Evidence from international data. Journal of Banking & Finance, 31(3), 641-658.
• Kadapakkam, P.R., Kumar, P. C., Riddick, L.A. (1998), The impact of cash flows and firm size on investment: The international evidence, Journal of Banking and Finance, 22, 293-320.
• Kaplan, S.N., Zingales L. (1997), Do investment –cash flow sensitivities provide useful measures of financing constraints Quarterly Journal of Economics 112, 169-215.
• Kaplan, S.N., Zingales, L. (2000), Investment –cash flow sensitivities are not valid measures of financing constraints, Quarterly Journal of Economics 115, 707-712.
• Kato, H.K., Loewenstein, U., Tsay W. (2002), Dividend policy, cash flow, and investment in Japan Pacific-Basin
• Finance Journal 10, 443 – 473 Khanna, T. ve Yafeh, Y. (2005), Business groups and risk sharing around the world. Journal of Business, 78, 301- 3
• Khanna, T., Palepu, K.(2000), Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified
• Indian Business Groups The Journal of Finance Volume 55, Issue 2, pages 867–891 Knoll, S. (2008), Cross-Business synergies a typology of cross-business synergies and a mid-range theory of continuous growth synergy realization. Doktora tezi, The University of St. Gallen, Almanya
• Lensink, R., Van der Molen,R. Gangopadhyay, S.(2003), Business groups, financing constraints and investment: the case of India, The Journal of Development Studies 40 (2), 93-119
• Lin C., Ma, Y., Xuan, Y. (2011), Ownership structure and financial constraints: Evidence from a structural estimation, Journal of Financial Economics, 102, 416-431
• Lincoln, J. R., Gerlach, M. L. ve Ahmadjian, C. L. (1996), Keiretsu networks and corporate performance in Japan.
• American Sociological Review, c. 61, 67-88. Lincoln, J.R. and Michael, L. Gerlach (2004), Japan’s Network Economy: Structure, Persistence, and Change.
• Cambridge University Press. Mizen, P., Vermeulen, P. (2005), Corporate Investment & Cash Flow Sensitivity What drives the relationship,
• European Central Bank Working Paper Series No:485 Modigliani, F., Miller, M. (1958), The cost of capital, corporation finance, and the theory of investment American Economic Review 57, 2061-2092.
• Moyen, N.(2004), Investment–Cash Flow Sensitivities: Constrained versus Unconstrained Firms The Journal of
• Finance, Volume 59, Issue 5, 2061–2092
• Myers, S., Majluf, N. (1984), Corporate financing and investment decisions when firms have information that investors do not have Journal of Financial Economics, vol. 13, issue 2, pages 187-221
• Pindado, J., Requejo, I., Torre, C. (2011), Family control and investment–cash flow sensitivity: Empirical evidence from the Euro zone Journal of Corporate Finance, Vol.17, issue 5, 1389-1409
• Rajan, R., Servaes,H., Zingales, L. (2000), The Cost of Diversity: The Diversification Discount and Inefficient
• Investment Journal of Finance, vol. 55 issue 1, 35-80
• Richardson, S., (2006), Over-investment of free cash flow. Review of Accounting Studies 11, 159- 189.
• Sasidharan, S., Lukose, P.J.J., Komera, S. (2015), Financing Constraints and investments in R&D: Evidence from
• Indian manufacturing firms The Quarterly Review of Economics and Finance, 55, 28-39
• Shin, H.H., and Stulz, R. (1998), Are internal capital markets efficient?, Quarterly Journal of Economics 113, 531– 5
• Shin, H.H., Park, Y. (1999), Financing constraints and internal capital markets:Evidence from Korean chaebols
• Journal of Corporate Finance 5, 169-191
• Tsai, Y.J., Chen, Y.P., Lin, C.L., Hung J.H. (2014), The effect of bankiing system reform on investment-cash flow sensitivity:Evidence from China Journal of Banking and Finance, 46, 166-176
• Williamson, O. E. (2008), Transaction cost economics: the precursors. Journal Compilation Institute of Economic Affairs, c. 28, s. 3, 7-14
• Wei, K.C.J., Zhang, Y. (2008), Ownership structure cash flow, and capital investment: Evidence from East Asian economies before financial crisis Journal of Corporate Finance, 14, 118-132