WORKING CAPITAL AND FIXED INVESTMENT - NEW EVIDENCE ON FINANCING CONSTRAINTS

This article presents new tests for finance constraints on investment by emphasizing the often-neglected role of working capital as both a use and a source of funds. The coefficient of endogenous working capital investment is negative in a fixed-investment regression, as expected if working capital competes with fixed investment for a limited pool of finance. This finding addresses a criticism of previous research on finance constraints, that cash flow may simply proxy shifts in investment demand. In addition, previous studies may have under-estimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital.