• Equity Market Liberalization and Financing Constraints of Equity-Dependent Firms: Evidence from Taiwan

Abstract

We test whether favorable equity-market liberalization, an exogenous supply shock to equity-financing channel, could reduce financing constraints of equity-dependent firms that depend on external equity to finance their productive investments. Using Taiwan’s first stock-market liberalization starting in January 1991, which experienced a significant reduction in expected returns, we find that investment-cash flow sensitivity for equity-dependent firms was primarily positive before liberalization and declined significantly after liberalization, but not for non-equity-dependent firms. We also find that the same pattern exists for non-dividend-paying firms that are most likely to suffer from financing constraints, but does not exist for dividend-paying firms.

Keywords: Financing constraints, equity-market liberalization, capital investments, the investment-cash flow sensitivity