The impact of financial constraints on the relationship between cash flow and external financing of companies listed in Stock Exchange

Author Name(s): Fariba Vahid, *Karim Nemati, Mohammad Kheiry
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The aim of this study is to investigate the effect of the financial constraints on the relationship between cash flow and external financing of company listed in the Tehran Stock Exchange. This research is an applied-correlation study. Data was collected using information reported in the financial statements of companies listed on the Stock Exchange of Tehran. In order to fulfill the objectives of the study, two hypotheses have been developed. The sample of study included 126 companies over a five-year period from 2008 to 2014. To analyze the data, Excel and Eviews 7 software was used. To measure hypotheses, regression test, Durbin-Watson test, and Hasmer and Fisher test were used. The results of this study indicated significant impact of operating cash flows on external financing. Financing constraints have a significant impact on relationship between operating cash flows and external financing.


The ability of companies to determine the appropriate financing resources and making correct decision in this regard is considered as the main success factors of the company. The most important objective that the management should pay attention to it at the time of choosing a financing method is increasing the wealth of shareholders. It means that the company should select the resources that minimize the cost of financing by considering the cost of the different resources of financing and its impact on company’s risk and return. The appropriate combination of financing resources is associated with characteristics such lower capital cost and increased rate of return.Investigation of previous studies shows that most of studies on financing methods and their impact on return have emphasized on the relationship between selection of financing resources and return of companies, the preference of external resources of financing over internal resources of financing or vice versa, to achieve an desired capital structure, and the relationship between capital structure and risk (Molanazari, 2009, p 30).



Results of first hypothesis testing show that operating cash flows have significant impact on external financing in companies listed in Tehran Stock Exchange.  The probability of T statistic related to variable of operating cash flows is 0.000 (less than 0.05), and its coefficient is -0.304.  Therefore, it can be concluded that there is negative and significant relationship between operating cash flows and external financing in companies listed in Tehran stock exchange so that by increasing operating cash flows, external financing decreases in companies listed in Tehran Stock Exchange.  Therefore, such companies select mainly cash flow created inside the company as the first solution of financing, followed by debt and stock release respectively. As profitable companies that have mainly good cash show lower tendency to borrowing, companies with the appropriate operating cash flow use external financing at lower level.

The results of this research are in line with results of studies conducted by Fazari et al (1988), Myers (1984), Garcia and Sugurb (2014), while they are inconsistent with results of George et al (2010), Bagherzadeh (2003).

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