In an imperfect market, information asymmetry between corporate insiders and outsiders invariably results in costly external financing, which causes the adverse selection problem. Managers may be forced to give up positive NPV projects external capital by issuing underpriced securities. Therefore, cash flow and cash can benefit those firms facing external financing constraints by funding necessary expenditures, which makes their investment sensitive to the availability of internal funds. The aim of this study was to evaluate the effect of excess cash on capital expenditure with an emphasis on financial constraints.
population study of research include firms listed in the Tehran Stock Exchange within the time period 2009 to 2014 and the sample used 107 companies are included. Using the pooling data regression analysis we test the research hypotheses.
The Results of this study showed that excess cash have the impact on capital expenditure. In other words, when excess cash as an internal resource of financing increases, firms needs to decrease external finance. Findings also indicate that financial constraints have the moderating role on the relation between excess cash and capital expenditures. In other words, when the company is facing to financial constraints because it increases the cost of external financing for capital expenditures, so dependence on internal resources (excess cash) increased.