The impact of cross-ownership on the reaction of corporate investment and financing constraints: a panel threshold model

This paper studies whether or not investment decisions are financially constrained in a cross-ownership system of Taiwan. Different from the financial structure in the USA, subsidiaries in Taiwan are allowed to buy stocks of the parent companies. Hence, the conventional debt-to-equity ratio is inappropriate to divide firms into high and low-debt firms. Instead, a new threshold variable - the adjusted debt-equity ratio (ADE) - is employed to divide the sample into high-debt firms and low-debt firms. A panel of 115 Taiwan-listed firms for the period 1991-1997 is used. Evidence supports the cash flow hypothesis and ADE has a notable significant influence on the financial constraints.