External Finance Constraints and the Timing of Investment Spikes

Is the timing of a firm's large-scale investment (investment spike) affected by external finance constraints? We use firm-level quarterly data including those on unlisted firms, and estimate the investment hazard rate, i.e., the probability of undertaking a new investment spike today as a function of the time elapsed since the last spike, and examine how external finance constraints affect the hazard rate. Our results show that the firms which fall under industries heavily dependent on external finance, those which fall under industries with low tangible fixed asset ratios, and those firms with a large amount of outstanding debt compared with cash flow, have lower hazard rates than other firms. This suggests that external finance constraints delay the timing of investment spikes. Further, the estimated hazard rate is an increasing function of time, which is consistent with the theoretical prediction. Our results suggest that a policy of alleviating companies' external finance constraints will be helpful if fiscal and monetary policies are to be effective quickly.