Does the Switch from OTC to the Exchange Alleviate a Firm’s Extent of Financial Constraints – A Case of Taiwan Stock Market
Date Issued
2005
Date
2005
Author(s)
Chen, Yu-Chun
DOI
en-US
Abstract
This paper aims to answer the question: “Does the transferring from OTC to the Exchange alleviate a firm’s extent of financial constraints?” Baker, Powell and Weaver (1999) indicate that the motives for firms to switch to a larger exchange include management’s desire to improve a firm’s visibility and prestige, to signal its confidence in the firm’s future performance, and to improve liquidity and marketability. These benefits of switching may enable firms to alleviate their degree of financing constraints by reduced information asymmetry and risk. Financing constraints, as defined by Lamont, Polk and Saa-Requejo (2001) are frictions that prevent the firm from funding all desired investments, or “the inability to fund investment due to credit constraints or inability to borrow, inability to issue equity, dependence on bank loans, or illiquidity of assets.” We use the Fazzari, Hubbers and Peterson (1988) cash flow model to examine whether the switch of OTC firms to the TSE affects firms’ financing constraints. Samples of Taiwanese firms for the period 1998-2003 are used for the study.
Based on the empirical results we analyzed, the new requirement of transferring could help us tell the degree of financing constraints between the stayers and other firms unqualified of applying for transferring in the OTC market. Besides, the tests on whether the switch affects the degree of financing constraints show that the degree of financing constraints gets worse significantly after switching. The reason may be that firms’ visibility and reputation are enhanced, therefore uncertainty reduced and cost of capital reduced. Lower cost of capital may induce firms to invest more and hence may increase their degree of financing constraint. In other words, the increases of visibility and liquidity from switching may not have monotonic relationship with the degree of financing constraints that firms suffer.
Subjects
上櫃轉上市
融資限制
Listing change
Financing constraints
Type
thesis
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