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Corporate investment: Financial Market Imperfection - Dissertation Example

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Corporate investment: Financial Market Imperfection

In the middle of perfect capital market, the decision on a company’s investment ought not to be altered by the firm’s financing positions. The imperfection on capital market nevertheless, brings in a barrier the costs of external cash flow and the internal funds. Companies that are facing greater levels of imperfection in information exhibits wider barriers hence they possess more sensitive investment that affect decisions of investment and financing. This study explores evidence showing that the investments firms that are financially constrained are very sensitive to the amount of internal funds that the firm can access. Referring to Some recent studies, there have been other evidences which indicate that the estimated sensitivity on cash flow has reduced in the 30 years between 1970 and 2000. This decrease in the cash- flow sensitivity indicates the possibility of the intervention between investment market imperfections for this two decades’ period.
In this study, we begin by verifying the outcome that the sensitivity of the cash flow has been declining through the years. The next step involves the process of exploring the causes of the decline. This verification takes place by evaluating a number of factors associated with the capital market imperfections, including the aggregate measure of fund flows, the institutional ownership, corporate governance and the analyst’s account of the firm’s legacy. ...
The next step involves the process of exploring the causes of the decline. This verification takes place by evaluating a number of factors associated with the capital market imperfections, including the aggregate measure of fund flows, the institutional ownership, corporate governance and the analyst’s account of the firm’s legacy. For a period of the last two to three decades, this study reveals a constant rise in the level of investments through firms like retirement funds and mutual funds. The rise in these sources of fund flows majorly occurs due to the rise in the firms’ market liquidity for a period of time. Structure of the work This study seeks to explore hypothesis that even though the final rise in the levels of fund flows leads to the fall in imperfections related to liquidity for every firm, the result is usually greatest on the companies with large shareholdings. It tests the hypothesis by using the aggregate funds data and analyzing the effects of institutional ownership on the potential sources of external financing of small growth institutions. The study presents 2 opposite views without any distinct conclusions. The second hypothesis that this study explores is the fact that mutual funds usually goes for stocks with high flow of information as well as liquidity. It analyzes the equity ownership in the U.S. companies and declares whether the institutions indeed prefer the high share turnover stocks of the old and large value. We will describe this as the liquidity preference of companies. 1. Literature Review 2.1. The main Results of the Topic Studies have shown that corporate institutions are more active in trade than individual investors. Additionally, assets ...Show more


Studies have revealed a constant fall in the sensitivity of cash flow for a number of years, especially after the 1970s. The issue of imperfection of the capital market controls the fall in the level of cash-flow sensitivity for a specific period of time. Flow of funds reduces the sensitivity of cash flow of all companies…
Author : gaufderhar
Corporate investment: Financial Market Imperfection essay example
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