THE IMPACT OF INTERNAL FINANCE AND FINANCIAL CONSTRAINTS ON INVESTMENT: EMPIRICAL EVIDENCE FROM MANUFACTRING SECTOR OF PAKISTAN

Abstract

Many studies estimates investment-cash flow sensitivities (ICFS) and the financial constraints impact on investment. However, a controversy exists in the literature to substantiate ICFS as a representative of financial constraints. This thesis re-examine the controversy by investigating panel data of 288 listed Pakistani firms predefined as constrained and unconstrained over a period of 2002 to 2012. Higher ICFS signify superior financial constraints. For robust estimations, five different criterions for pre classification have been adopted. Using First Difference Generalized Method of Moments (GMM) technique for estimation results reveals strong and positively significant investment-cash flow sensitivities for full as well as sub samples. Additionally, results demonstrate that investment – cash flow sensitivity of constrained group is significantly higher relative to unconstrained firms. Thus proper investment and development policy should be instigated to reduce capital market imperfections and to promote private corporate investment in Pakistan.