The Effect Of Financing Constraints On SMES’ Investment Spending

In the1960s, MM theory has proved that the investment decisions did not correlate tothe company’s financial structure under some strict assumptions. However, in reality,many problems such as information asymmetry and agency costs break the perfection ofthe market, which makes financing constraints. Although current research on financingconstraints and company investment spending are consistent to some extent, there are stillsome existing differences. Due to the uncertain relationship, and the fact that many laws inthe developed capital markets are not suitable for our developing market, research onfinancing constraints and investment of China’s capital market is fairly necessary,especially for the small and medium enterprises which suffer from great financingobstacles and constraints. This situation makes our study more meaningful.This paper systematically explained the theory of financing constraints andinvestment, and made a review of the relevant native and foreign literature. On this basis,we selected seven representative financial indicators, and built a scoring formula tomeasure financial constraints by using factor analysis method. Then we constructedregression models for the four research hypotheses, and made an analysis by using multiplelinear regression. Finally we discovered that all of financing constraints, internal cash flowand investment opportunities would affect SMEs’ investment spending. Financingconstraints was negatively correlated to investment spending. Internal cash flow andinvestment opportunities were positively correlated to investment spending. In addition,financing constraints also affected the degree of the internal cash flow and investmentopportunities impacting on investment spending, and were affected by the internal cashflow and investment opportunities at the same time.Finally, the paper gives specific suggestions: Strengthen the management of corporatecash flow, and improve the operational efficiency in cash. Reduce the financing constraintscaused by information asymmetry, improve the efficiency of capital markets and improvethe information disclosure system. Harden budget constraints and reduce the corporatefinance constraints. Give preferential policies for SEMs, and attach importance to the financing difficulties in the SMEs’ development.