Case Study helpful for MBA students

1. Working Capital and Fixed Investment:
New Evidence on Financing Constraints

2. INTRODUCTION
Working Capital and Fixed Investment: New Evidence on Financing Constraints
AUTHOR(S)
Steven M. Fazzari and Bruce C. Petersen
SOURCE
The RAND Journal of Economics,
Vol. 24, No. 3 (Autumn, 1993), pp. 328-342
PUBLISHED BY:
Wiley on behalf of RAND Corporation

3. INTRODUCTION
 This research paper is analyzing the financial constraints by
emphasizing the often neglected role of working capital.
 This research is explained why access to internal finance
may effect firm investment and growth.

4. RESEARCH OBJECTIVES
 The objective of this research paper is
highlighting the role of working capital to
overcome financial constraints on investment.

5. INVESTMENT IN FIXED AND WORKING CAPITAL
WITH FINANCE CONSTRAINTS
 The role of working capital
Working capital measures the position of firms liquid assets.
 Fixed investment smoothing with working capital
1. A constrained firms can not equate marginal return on
investment to the market cost of capital.
2. Fixed assets smoothing should depends on its initial
stock of working capital.
3. In this sense the strength of the firm’s balance sheet
measured by its working capital can affect the link
between fixed investment and cash flow.

6. EMPIRICAL PREDICTIONS
The two main testable predictions emerge from
considering investment in fixed and working capital
when firms face finance constraints:
(1) Working-capital investment, when included as an
endogenous variable in a fixed-investment
regression, will have a negative coefficient.
(2) The standard "within-firm" estimator will
understate the full effect of internal finance on
fixed investment and overstate the effect of cash
flow on working-capital investment.

7. LITERATURE REVIEW
Fazzari, Hubbard, and Petersen (1988)
Gertler and Hubbard (1988)
Devereux and Schianterelli (1990)
Hoshi, Kashyap, and Scharfstein (1991)
Oliner and Rudebusch (1992)
Gilchrist (1990)
Himmelberg (1990)
Hubbard and Kashyap (1992)
Whited (1992)
Carpenter (1992)
Poterba (1988)

8. LITERATURE REVIEW
Blinder and Maccini (1991)
Bernanke and Gertler (1989)
Calomiris and Hubbard (1990)
Stiglitz and Weiss (1981)
Myers and Majluf (1984)
Eisner and Strotz (1963)
Lucas (1967)
Bernstein and Nadiri (1989)
Chirinko and Fazzari (1992)
Dewing (1941)
Pindyck (1991)
Meltzer (1960)

9. RESEARCH METHODOLOGY
Research Design
 Time Horizon: Regression OLS
 Data Type: Panel
 Data From : 1970 – 1979 (Nine Years data)
 Software Employed: EViews 5.1

10. CONCLUSION
When working capital investment included in a
Fixed Investment regression as use or source
of
funds it has negative effect. They focus on the
behavior of firms who virtually pay no dividends
because they face binding finance constraints.

11. RECOMMENDATION S
 In order to increase the profitability of the
companies, it is suggested to control the cost of
goods sold and operating expenses.
 The few companies, which did not follow a definite
policy of financing fixed assets, should follow such
policy.
 The management should try to utilize their
production capacity fully in order to reduce factory
overheads and to utilize their fixed assets properly.
 There has been too much of government
interference in policy and day-to-day working and
decisions. This leads to delays in decision-making.
This should be abolished.

12. DEDICATION
The Most Convivial & Amiable Teacher we ever had
“SIR RAHEEL BHAGAR”