Determinants and Consequences of Financial Constraints: A Review of the Empirical Literature
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Date
2021-09-01
DOI
Open Access Location
Journal Title
Journal ISSN
Volume Title
Publisher
The Hong Kong Polytechnic University
Rights
(c) 2021 The Author/s
CC BY 4.0
CC BY 4.0
Abstract
We synthesise the empirical literature on the determinants and consequences of financial constraints in the disciplines of accounting and finance, critique the findings, and offer suggestions for future research. A prolonged run of financial constraints can eventually lead to corporate failure, because a company’s financial performance depends on its ease of access to external financing. Determinants of financial constraints encompass firm-level fundamental, macro-economic, and corporate governance variables, with an overwhelming majority of papers using the investment-cash flow sensitivity model for measuring financial constraints. We also review the empirical literature on the consequences of financial constraints. Financial constraints lead to higher cash holdings, less asymmetric cost behaviour, and fewer innovations. Constrained firms also use income-increasing accruals more aggressively than unconstrained firms do. Finally, financially constrained firms avoid taxes in order to produce temporary cash tax savings.
Description
Keywords
Financial Constraints, Investment-Cash Flow Sensitivity, Corporate Governance, Financial Reporting, Cash Holdings
Citation
Habib A, Costa M, Jia J. (2021). Determinants and Consequences of Financial Constraints: A Review of the Empirical Literature. China Accounting and Finance Review. 23. 3. (pp. 78-126).