Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales

We examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales. Asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities. The cross-sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation. We find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained.