No. This paper investigates the relationship between �nancing constraints and investment-cash �ow sensitivities by analyzing the �rms identi�ed by Fazzari, Hubbard, and Petersen as having unusually high investment-cash �ow sensitivities. We �nd that �rms that appear less �nancially constrained exhibit signi�cantly greater sensitivities than �rms that appear more �nancially constrained. We �nd this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that �rms are more �nancially constrained. These �ndings call into question the interpretation of most previous research that uses this methodology. “Our �nancial position is sound... Most of the company’s funds are generated by operations and these funds grew at an average annual rate of 29 % [over the past 3 years]. Throughout the company’s history this self-�nancing concept has not been a constraint on the company’s growth. With recent growth restrained by depressed economic

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This article studies the design and valuation of debt contracts in a general dynamic setting under uncertainty. We incorporate some insights of the recent corporate finance literature into a valuation framework. The basic framework is an extensive form game determined by the terms of a debt contract and applicable bankruptcy laws. Debtholders and equityholders behave noncooperatively. The firm’s reorganization boundary is determined endogenously. Strategic debt service results in significantly higher default premia at even small liquidation costs. Deviations from absolute priority and forced liquidations occur along the equilibrium path. The design tends to stress higher coupons and sinking funds when firms have a higher cash payout ratio. This article studies the design and valuation of debt contracts in a general dynamic setting under uncertainty. In doing so we draw together two strands of the finance literature that have developed significantly in recent years, but have done so in large part indepen-We have benefited from the comments of seminar participants at the

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recently, however, proponents of the legal-based view of financial development have argued that the century long debate concerning bank-based versus market-based financial systems is analytically vacuous. According to this view, the critical issue is establishing a legal environment in which both banks and markets can operate effectively. This paper represents the first broad, cross-country examination of which view of financial structure and economic growth is most consistent with the data.

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This paper provides a micro-level evidence that financial development impacts growth by reducing financing constraints that would otherwise restrict efficient firm investment. I estimate a structural model based on the Euler equation for investment using firm-level data from 40 countries. I find a strong negative relationship between the extent of financial market development, and the sensitivity of investment to availability of internal funds (a proxy for financing constraints). I also consider size effect, business cycles and legal environment as plausible alternative explanations and find the results to be robust in all cases.

This paper investigates whether management ownership structures and large non-management blockholders are related to firm value across a sample of 1433 firms from 18 emerging markets. When a management group’s control rights exceed its cash flow rights, I find that firm values are lower. I also find that large non-management control rights blockholdings are positively related to firm value. Both of these effects are significantly more pronounced in countries with low shareholder protection. One interpretation of these results is that external shareholder protection mechanisms play a role in restraining managerial agency costs and that large non-management blockholders can act as a partial substitute for missing institutional governance mechanisms.

We use a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region’s financial crisis. The crisis negatively impacted firms’ investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors. During the crisis, cumulative stock returns of firms in which managers have high levels of control rights, but have separated their control and cash flow ownership, are 10 to 20 percentage points lower than those of other firms. The evidence is consistent with the view that ownership structure plays an important role in determining the incentives of insiders to expropriate minority shareholders. *Michael Lemmon and Karl Lins are Associate and Assistant Professors of Finance, respectively, at the

The pattern of disagreement between bond raters suggests that bank and insurance firms are inherently more opaque than other firms. Moody’s and S&P split more frequently over these financial intermediaries and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from their assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks ’ high leverage, which invites agency problems, compounds the uncertainty over their assets. Our findings bear on both the existence and reform of bank regulation.