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Determinants and consequences of financial constraints: a review of the empirical literature


Habib, A and Costa, MD and Jia, J, Determinants and consequences of financial constraints: a review of the empirical literature, China Accounting and Finance Review, 23, (3) pp. 78-126. ISSN 1029-807X (2021) [Refereed Article]

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© The Author(s) 2021. This article is published with open access by The Hong Kong Polytechnic University. This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited


We synthesise the empirical literature on the determinants and consequences of financial constraints in the disciplines of accounting and finance, critique the findings, and offer suggestions for future research. A prolonged run of financial constraints can eventually lead to corporate failure, because a company’s financial performance depends on its ease of access to external financing. Determinants of financial constraints encompass firm-level fundamental, macro-economic, and corporate governance variables, with an overwhelming majority of papers using the investment-cash flow sensitivity model for measuring financial constraints. We also review the empirical literature on the consequences of financial constraints. Financial constraints lead to higher cash holdings, less asymmetric cost behaviour, and fewer innovations. Constrained firms also use income-increasing accruals more aggressively than unconstrained firms do. Finally, financially constrained firms avoid taxes in order to produce temporary cash tax savings.

Item Details

Item Type:Refereed Article
Keywords:financial constraints, investment-cash flow sensitivity, corporate governance, financial reporting, cash holdings
Research Division:Commerce, Management, Tourism and Services
Research Group:Accounting, auditing and accountability
Research Field:Financial accounting
Objective Division:Commercial Services and Tourism
Objective Group:Financial services
Objective Field:Financial services not elsewhere classified
UTAS Author:Jia, J (Dr Jing Jia)
ID Code:148794
Year Published:2021
Deposited By:Accounting
Deposited On:2022-02-10
Last Modified:2022-03-10
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