Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.701865
Title: Corporate investment & financing decisions : market valuation, capital constraints & timing
Author: Kalaji, Ibrahim
ISNI:       0000 0004 5993 9741
Awarding Body: University of Essex
Current Institution: University of Essex
Date of Award: 2015
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Abstract:
Fictions and Frictions. Are capital markets impeded by frictions or fuelled by fictions? The focus in the study is on two important decisions of corporations: capital investments and raising of finance. It has a three-fold purpose: (i) to investigate the role that timing plays in the industrial environment within which firms make investments (ii) to test for frictions in the investment decisions of firms and (iii) to examine the equity issuing behaviour of firms. Not un surprisingly controversy surrounds the issue of whether capital markets are prone to failures and frictions. We investigate three different but associated aspects of the wider economic policy debate surrounding this perennial thorn. The first is an industry level study employing novel data collected from surveys conducted by the Confederation of British Industry (CBI). The second and third studies are at firm level and seek evidence of capital market frictions in the investment and financing decisions of UK firms. Employing an unbalanced panel of company data collected from Thomson Reuters' DataStream database from 1994-2010, we estimate investment-cash flow sensitivities, estimate valuation models as well as marginal likelihoods within probit models, to help address three associated aspects of this wider debate. The motivation for the industry level study is whether there is evidence managers make investment expenditures in a manner that accounts for irreversibility - a features of all large fixed capital additions. Though a sophisticated theory of real options addresses this shortcoming, empirical evidence relating to it is sparse, since reliable evidence requires gathering of forward looking data concerning expectations of the future, as seen from the perspective of managers facing such capital investment decisions. The Confederation of British Industry (CBI) conducts a quarterly survey of a representative sample of senior mangers of British manufacturing firms through its Industrial Trends Survey (ITS), primarily seeking forward-looking perceptions and expectations with respect to future demand and the need to make additions to capital. The issue we investigate is whether there is an increased chance that capital investments will be made in forthcoming quarters conditional on supposed determinants and whether this likelihood is driven by anticipations and expectations of the future in the manner prescribed by real options theory. We have several interesting findings: the lower the prices for second hand fixed assets (i.e. higher the irreversibility), the lower the rate at which shocks to investment demand are experienced; shortage of labour presents a major concern for managers when shocks are imminent; interestingly, shortage of internal financing has a significant impact, whereas inability to access external financing is not; surprisingly competition does not appear to be of concern to managers. AB regards friction in capital investment, one line of empirical research has been to establish whether investments of firms are sensitive to the availability of internal funds. While we find cash flow matters, given the surprising finding that cash flow is not important in driving investment decisions of any type of firm other than small high- payout UK manufacturing firms, the major part of UK evidence runs contrary to earlier US evidence supporting Fazzari, Hubbard and Petersen (1988) and aligns more with recent evidence for the UK and US. We also sought to assess the relative contributions of market misvaluation (fictions) and growth options (fundamentals) to motivating equity issuance among UK firms. We evaluated the impact investor sentiment has on the issue of equity by the public offerings of shares for a higher price than fundamentals would justify. In this line of investigation, we further study clustering of equity issues where firms appear to raise funds by issuing in waves. We find growth trumps misvaluation in explaining who issues, while misvaluations trumps growth in explaining who issues on and off the wave as well as in explaining who issues late rather than early on the wave.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.701865  DOI: Not available
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