Review on Kaplan and Zingales Research Paper About...

Review and Evaluation on ‘Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints’ by Kaplan and Zingales (QJE,1997) The research paper written by Steven N. Kaplan and Luigi Zingales as titled above which was published in year 1997 is to test the relationship linking investment-cash flow with financial constraint. In their research, they found that firm with a low level of financial constraint have a tendency to have a high investment-cash flow sensitivity. However, the findings contradict with the other research paper especially the FHP, 1988 paper. They used the same sample used in research done by Fazzari, Hubbard, and Petersen (FHP, 1988). But they only took the firms from Class 1 in FHP research†¦show more content†¦Table IV (Appendix 2) from the research paper is to test the possibility that a firm fits in one of the five categories. It shows that firms with greater debt to total capital, Q, and restriction of dividend, have high tendency to be categorised as financially constrained, whereas firms that owns greater cash flow, cash, dividends paid, retained earnings, and unused line of credit, have high tendency to be categorised as not financially constrained. The analysis shown by Kaplan and Zingales indicate an opposite results with the other research papers. This may be due to the classification of the firms status they used is based on direct observation, and the test that they used to assess their financing constraint indicators is unclear. In their thorough study of financial constraint correlation with investment-cash flow sensitivity, Kaplan and Zingales (QJE,1997) were able to show the more realistic findings. A more narrow scope of samples used in their research which only include group of firms which have the least dividend payout ratio and more possibility to show the relationship. The counterexample and conflict of findings between different literatures is not uncommon, this is due to different assumptions raised by the researcher as explained in the journal. For instance, the study on cash holdings and financial constraint by Kashyap,Show MoreRelatedThe Stock Market and Corporate Investment: A Test of Catering Theory13012 Words   |  53 PagesThe Stock Market and Corporate Investment: A Test of Catering Theory Christopher Polk London School of Economics Paola Sapienza Northwestern University, CEPR, and NBER We test a catering theory describing how stock market mispricing might inï ¬â€šuence individual ï ¬ rms’ investment decisions. We use discretionary accruals as our proxy for mispricing. We ï ¬ nd a positive relation between abnormal investment and discretionary accruals; that abnormal investment is more sensitive to discretionary accrualsRead MoreFinancial Reporting Quality: Red Flags and Accounting Warning Signs14135 Words   |  57 PagesFinancial Reporting Quality and Investment Efficiency Rodrigo S. Verdi The Wharton School University of Pennsylvania 1303 Steinberg Hall-Dietrich Hall Philadelphia, PA 19104 Email: rverdi@wharton.upenn.edu Phone: (215) 898-7783 Abstract This paper studies the relation between financial reporting quality and investment efficiency on a sample of 49,543 firm-year observations between 1980 and 2003. Financial reporting quality has been posited to improve investment efficiency, but there has beenRead MoreThe Wacc Fallacy: the Real Eï ¬â‚¬ects of Using a Unique Discount Rate18805 Words   |  76 PagesKr ¨ ger u Geneva Finance Research Institute - Universit ´ de Gen`ve e e Augustin Landier Toulouse School of Economics David Thesmar HEC Paris and CEPR First Version: February 2011 This Version: September 2011 We greatly appreciate comments and suggestions by Malcolm Baker, Andor Gy ¨rgy, Owen Lamont, o Masahiro Watanabe, Jeï ¬â‚¬ Wurgler and seminar participants at the NBER Behavioral Finance Spring Meeting, the University of Mannheim, the 2011 European Financial Management Association meetingsRead MoreMerger and Acquisition: Current Issues115629 Words   |  463 PagesMergers and Acquisitions Current Issues Edited by Greg N. Gregoriou and Karyn L. Neuhauser MERGERS AND ACQUISITIONS Also edited by Greg N. Gregoriou ADVANCES IN RISK MANAGEMENT ASSET ALLOCATION AND INTERNATIONAL INVESTMENTS DIVERSIFICATION AND PORTFOLIO MANAGEMENT OF MUTUAL FUNDS PERFORMANCE OF MUTUAL FUNDS Mergers and Acquisitions Current Issues Edited by GREG N. GREGORIOU and KARYN L. NEUHAUSER Selection and editorial matter  © Greg N. Gregoriou and Karyn L. Neuhauser