Welcome to Microsoft® Office 2003 Editions, the easiest way to help more people use information to make a positive impact on business. The Office 2003 Editions offer new technologies and features while improving upon existing and familiar tools to facilitate effective and efficient collaboration and information sharing.
Through integration with Microsoft Windows® SharePoint™ Service, the Office 2003
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There is a large body of literature that suggests that because of information asymmetries and capital market imperfections, corporate investment expenditures are strongly influenced by a firm’s ability to internally generate cash. In an influential study, Fazzari, Hubbard, and Petersen (1988) show that firms that pay no dividends demonstrate higher sensitivity of investment to cash flow and suggest that investment-cash flow sensitivity reflects the tighter liquidity constraints faced by these firms. There has been subsequent empirical evidence supporting this finding, particularly for firms that are young, small, pay no dividends, have no bond rating. In another prominent study, Hoshi, Kashyap, and Scharfstein (1991) show that investment is much more sensitive to internal funds for independent Japanese firms compared to those that have close ties with banks and are therefore less likely to be financially constrained. In general, a strong positive effect of internal funds on investment has been interpreted as evidence reflecting the difference in the costs of external versus internal financing.
There is also a growing parallel literature that addresses some of methodological problems that were originally outlined in Poterba’s (1988) discussion of the Fazzari, Hubbard, and Petersen (1988) paper. The first strand of this literature questions how firms are classified into financially more or less constrained groups. For example, Kaplan and Zingales (1997), applying an alternative approach to classifying firms into financially more or less constrained, report that the sensitivity of investment to cash flows is not monotonic with respect to financial constraints. In particular, it is the lowest for firms that they classify as being the most likely to be financially constrained. The second strand of the literature addresses issues relating to measurement error in Tobin’s Q. Specifically, if investment opportunities are not measured properly, then cash flows, in addition to conveying information about internal liquidity, may also reflect information about future investment opportunities that are not captured by proxies for Q.
The recent wave of financial globalization and its aftermath has been marked by a surge in international capital flows among the industrial and developing countries, where the notions of tense capital flows have been associated with high growth rates in some developing countries. Some countries have experienced periodic collapse in growth rates and financial crisis over the same period. It is true that many developing economies with a high degree of financial integration have also experience higher growth rate. Low Developing Countries (LDCs) are eager to welcome any kind of foreign capital inflows to overcome the debt crisis situation. They are facing the challenges from the foreign capital and the invisible resource. From the supply side also there are some strong inducing factors, which led the international investors towards the financial market of the developing countries. The correlation between the movements in developed and developing countries financial market, the deceleration in industrial economy markets and high growth prospects of the less developed market are some of the important reasons, which made them an attractive option for portfolio diversification.
It is fact that international capital flows on financial market can be very volatile. However, different countries experienced different degree of volatility of financial market and this may be systematically related to the quality of macro economic policies and domestic financial governance. In this context high volatility of capital flows has affected the macro economic variables such as exchange rate, interest rate, money stock (M3) and inflation negatively. Even in countries where a conducive atmosphere is created for the free flow of capital and authorities don’t operate with any current account deficit complicates the assessment of integration in financial market. Capital flows have significant potential benefits for economies around the world. Countries with sound macroeconomic policies and well-functioning institutions are their best to reap the benefits of capital flows and minimize the risks. Countries that permit free capital flows must choose between the stability provided by fixed exchange rates and the flexibility afforded by an independent monetary policy.
