This paper studies whether or not investment decisions are financially constrained in a cross-ownership system of Taiwan. Different from the financial structure in the USA, subsidiaries in Taiwan are allowed to buy stocks of the parent companies. Hence, the conventional debt-to-equity ratio is inappropriate to divide firms into high and low-debt firms. Instead, a new threshold variable?–?the adjusted debt–equity ratio ( ADE )?–?is employed to divide the sample into high-debt firms and low-debt firms. A panel of 115 Taiwan-listed firms for the period 1991–1997 is used. Evidence supports the cash flow hypothesis and ADE has a notable significant influence on the financial constraints.
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Document Type: Research Article
Department of Money and Banking, National Chengchi University, Mucha, Taipei 116, Taiwan
Department of Banking and Finance, National Chi-Nan University, 1 University Rd, Puli, Nantou 545, Taiwan
Publication date: 2005-11-10
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