Kasetsart Journal of Social Sciences xxx (2018) 1e12

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Kasetsart Journal of Social Sciences

journal homepage: http://www.elsevier.com/locate/kjss

Financial development, financial constraint, and firm

investment: Evidence from Thailand
Attasuda Lerskullawat
Department of Economics, Faculty of Economics, Kasetsart University, Bangkok 10900, Thailand

article info ABSTRACT

Article history: This paper examines the effect of firm financial constraint and financial development on
Received 27 October 2017 firm investment using data from non-financial companies in Thailand from 1999Q1 to
Received in revised form 17 December 2017 2015Q4. The empirical results showed a significant effect of firm financial constraint on
Accepted 25 January 2018
their investment. The cash flow of firms had a positive effect on firm investment, while the
Available online xxxx
leverage ratio of firms had a negative effect. Financial development also weakened the
effect of firm financial constraint on firm investment. These effects were considerably
Keywords:
higher in more financially constrained firms than less constrained ones.
financial development,
© 2018 Kasetsart University. Publishing services by Elsevier B.V. This is an open access
firm financial condition,
article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/
firm financial constraint,
4.0/).
firm investment,
Thailand

Introduction the firm investment, as firms will have greater difficulty in

investing and finding external funding sources (Agca &
Financial condition, or the financial constraint of a firm, Mozumdar, 2008; Butzen, Fuss, & Vermeulen, 2001;
is an important factor influencing firm investment. Ac- Gilchrist & Himmelberg, 1995; Rungsomboon, 2005).
cording to Farre-Mensa and Ljungqvist (2013) and Silva and Bond, Elston, Mairesse, and Mulkay (1997) and Chatelain,
Carreira (2012), financial constraint can be a measure of the Generale, Hernando, Von Kalckreuth, and Vermeulen
firm's financial condition or the firm's balance sheet con- (2003) explained that the financial condition of firms,
dition, such as firm cash flow, leverage, and size. In this including cash flow and firm size, can affect firm invest-
case, the greater the financial constraint of firms, the ment. Angelopoulou and Gibson (2007) and Guariglia
weaker the firm's financial condition. Also, firm investment (1999) also showed that leverage and the dividend pay-
is usually considered as the firm's fix assets, such as prop- out ratio of firms can also affect firm investments. They
erty, plant, equipment, and their depreciation (Bhaduri, explained that large firms with high cash flow, dividends,
2005; Rungsomboon, 2005; Soumaya, 2012). Regarding and with low leverage, will have less financial constraint.
the theory of firm investment, financially constrained firms These firms generally have more opportunities to extend
are considered to have a weaker balance sheet condition their investment compared with more constrained ones.
and hence higher external funding costs, compared to Apart from firm financial constraint or condition, financial
those with lower financial constraints. This is because more development can also influence investment, and affect the
financially constrained firms will have relatively low relationship between financial constraint and investment.
liquidity and capital as well as a higher default risk. As a According to Demirgüç-Kunt and Levine (2008) and Singh,
result, the more financial constraint a firm has, the lower Razi, Endut, and Ramlee (2008), financial development is
the condition where there is the development of financial
intermediaries and markets including financial institution
E-mail address: [email protected].
Peer review under responsibility of Kasetsart University.
development and capital market development. The effect

https://doi.org/10.1016/j.kjss.2018.01.010
2452-3151/© 2018 Kasetsart University. Publishing services by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://
creativecommons.org/licenses/by-nc-nd/4.0/).

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
2 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12

of financial development can weaken the impact of finan- liquidity compared to developing countries (Beck,
cial constraint on firm investment. Laeven (2003) and Love Demirgüç-Kunt, & Levine, 2009; Beck & Levine, 2002).
(2003) stated that financial development through banking Consequently, the effect of financial constraint on firm in-
sector and capital market development can support the vestment as well as the effect of financial development on
firm balance sheet condition by increasing external funding the way in which financial constraint affects firm invest-
opportunities and increasing investment opportunities for ment will possibly be greater in a developing market than
firms. This reduces the dependence of firms on their in- in developed ones because firms in a developing market
ternal funding sources as well as improving the firm will have greater difficulty in obtaining external funding
financial condition. Therefore, the effect of firm financial sources compared to firms in a developed market. Thus,
constraint on firm investment will become weaker when firm investment in a less-developed market will depend
there is financial development that facilitates the firm more on the firm's internal source of funds as well as firm
increasing its investment by using its external funding financial constraint, and the effect of financial development
sources to fund investment compared with previously on the way in which financial constraint affects firm in-
using internal funds (Galindo, Schiantarelli, & Weiss, 2007). vestment will become greater relative to a developed
Several studies have focused on the relationship be- market in which there is more opportunity to obtain
tween financial constraint, financial development, and firm funding sources from the financial market. Therefore, this
investment, particularly the effect of financial constraint on paper will shed light on a case study in a developing
firm investment, mainly in developed countries (Agca & country, Thailand, which will has a relatively less-
Mozumdar, 2008; Bond et al., 1997; Chatelain et al., 2003; developed financial market than those cases reported in
Chatelain & Tiomo, 2001; Love, 2003). Study on the effect the literature in developed markets. Third, regarding the
of financial development on firm investment is still limited. evidence study in Thailand, there is a lack of the study on
Such study mostly focuses on developed countries and also both the effect of financial constraint on firm investment as
on the individual aspect of financial development such as well as the effect of financial development on the way that
financial liberalization (Gelos & Werner, 2002; Harris, financial constraint affects firm investment. In addition,
Schiantarelli, & Siregar, 1994; Schiantarelli, Weiss, & regarding financial market development in Thailand, the
Jaramillo, 1996) and capital market development (Islam & financial situation in Thailand has been continually devel-
Mozumdar, 2007; Laeven, 2003; Love, 2003). Therefore, oping, especially after the financial crisis period in 1997.
this has resulted in a lack of case studies in developing Between 1998 and 2001, there was significant financial
countries, including Thailand and also of the study of the development focus on restructuring plans to support
role of financial development and the effect of financial liquidity in the financial market and capital market devel-
constraint on firm investment. Therefore, this paper aims to opment. This was mainly shown by the establishment of a
fill the gap by introducing an evidential study of Thailand as Set-Trade dotcom PLC and Thai-NDVR PLC for electronic
a case study of a developing Asian country. The aims of the securities trading support, and the introduction of BATH-
paper are first to study the effect of firm financial constraint NET to support the Thai payment system (Bank of Thailand
or financial condition on firm investment in Thailand, and [BOT], 2002). In 2003, BOT introduced the Financial Sector
second to examine the effect of financial development on Master Plan Phase I (2003e2005) in order to expand
firm investment or the way in which the financial commercial banking businesses and support capital market
constraint of firms affects their investment. This paper has development. This was supported by the introduction of
three main motivations: First, this study fulfills the gap in the Bond Electronic Exchange (BEX) in 2003, the Derivative
the literature by also studying the influence of financial Market PLC in 2004, and the Thai Future Exchange market
development on the way in which financial constraint af- (TFEX) in 2005 (BOT, 2010, 2015). The BOT also issued the
fects firm investment which was rarely considered in the Financial Sector Master Plan Phase II (2010e2015), with the
reviewed literature. In this case, we also focus on both as- aim of supporting financial competition and Thai banking
pects of financial development including banking sector development. This was followed by the issuing of the new
development and capital market development in order to Financial Development Master Plan (2016e2020), with the
obtain more aspects of the influence of financial develop- aim of improving financial development in the country in
ment on the way in which firm financial constraint affects order to join the Asian Economic Community (AEC) (BOT,
their investment, as well as to supplement the previous 2015). We can see that Thai financial development
papers which only focused on individual aspects of finan- continued to develop since the financial crisis in 1997 and
cial development. Second, we fill the gap in previous therefore it is worthwhile to conduct an evidence study in
studies especially with regard to the effect of firm financial Thailand as a case study in an Asian developing country in
constraint or financial condition on firm investment, which order to explore how the financial development in the
previously was mostly focused on developed countries, by country affects the way that financial constraint of firms
introducing an evidence study of Thailand as a case study of affects their investment. The results from this study may
a developing Asian country. Concerning this study, the ef- assist the BOT and policy makers to apply financial devel-
fect of financial constraint on firm investment as well as the opment policy to control the economy, especially through
effects of financial development on the way in which the the firm sector in the future.
financial constraint of firms affects their investment will be We first found a significant effect of firm financial
different from those in developed countries because the constraint on firm investment in Thailand, and second, that
financial market in developed countries is considered to be financial development weakened the effect of firm financial
more financially developed regarding size, capital, and constraint on firm investment. These effects were higher in

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12 3

more financially constrained firms than less constrained et al. (1994) similarly found that the effect of financial
ones. development can lower the effect of a firms' cash flow on its
investment, as financial development can raise more op-
Literature Review portunities for external funding by the firm and lower its
dependence on its internal funds.
Several papers study the relationship between firm For the literature presented previously, the study of the
financial constraints and firm investment and find that the effect of financial constraint on firm investment has been
better the firm balance sheet condition or the less financial mainly focused on developed countries and study
constraint on the firm, the higher their investment. regarding the influence of financial development on the
Chatelain et al. (2003) examined the effect of firm financial way in which financial constraint affects firm investment is
constraint on firm investment in Germany, France, Italy and quite limited. These studies only examined an individual
Spain and found that an increase in firm cash flow could aspect of financial development, such as the effect of
positively affect the firm investment. Angelopoulou and financial liberalization or capital market development.
Gibson (2007) and Kaplan and Zingales (1997) stated that Moreover, these studies from this aspect mainly considered
a rise in US firm cash flow would lead to an increase in developed countries, leaving a gap regarding a developing
profit opportunities, improving the financial condition of country case study, such as Thailand, which has been rarely
firms and increasing liquidity and thus raising firm in- study in the reviewed research. Therefore, this study will
vestment. Other studies have also found similar results, investigate the effect of financial constraint on firm in-
such as those by Agca and Mozumdar (2008), Bond et al. vestment as well as the effect of financial development in
(1997), Chatelain and Tiomo (2001). Gaiotti and Generale terms of both banking sector and capital market develop-
(2001) found that the effect of firm cash flow on invest- ment on the way in which financial constraint or financial
ment in Italy was higher in more financially constrained condition of a firm affect firm investment in order to fill the
firms which were considered as small firms, compared gap in the reviewed literature.
with large ones. This result confirms that more financially
constrained firms will have fewer opportunities to obtain Methods
external funding sources and thus the investment of more
financially constrained firms will depend more on their Data Collection
internal funds, namely the firm cash flow, than external
funds. Rungsomboon (2005) found that the effect of cash The study used data from non-financial companies in
flow on firm investment in Thailand was higher especially Thailand which were listed on the Stock Exchange of
in the more financially constraint firms. Similar results Thailand (SET) from 1999Q1 to 2015Q4. These include all
were found by Butzen et al. (2001) and Lünnemann and firms in the seven industrial sectors in Thailand: the agri-
Matha € (2001). Guariglia (1999) showed that a higher cultural and food industry, natural resource industry,
leverage ratio of UK firms resulted in a decrease in their technological industry, services, industrial goods, con-
investment due to a higher default risk and thus an sumer goods, and the real estate and construction industry.
increased cost of external funding. Agung, Morena, The total sample of firms consisted of 490 non-financial
Pramono, and Prastowo (2002), Gilchrist and Himmelberg companies, with 33,320 firm-year observations. The
(1995), Kaplan and Zingales (1997), and Van Ees and financial market development indicators were obtained
Garretsen (1994) stated that the effect of both firm from the World Bank Global Financial Development Data-
leverage and firm cash flow on investment would be base (GFDD)1 and the database of Beck Demirgüç-Kunt, &
greater in the more financially constrained firms. Levine (1999). Table 1 presents a data description of all
Financial development also influences firm investment variables used in the study and summary statistics of the
as well as the way in which financial constraint or financial variables used in the study (number of firms, mean, mini-
condition of firms affect firm investment. However, studies mum value, maximum value, and standard deviation).
in this area are quite limited and mostly focus on developed Panel A shows the data description for the total sample of
countries, with no case studies in Thailand. Gelos and firms in Thailand, Panel B presents the data for the different
Werner (2002) found that the effects of firm cash flow on industrial sectors in Thailand, and Panel C describes the
firm investment were relatively low after the financial data for the financial development indicators used in this
liberalization period in Mexico. Similar results were found study. The data were truncated at the 1% and 99% percen-
in the case study reported in Laeven (2003) of a group of tiles in order to reduce outliner and noise data.
developing countries. Islam and Mozumdar (2007), Laeven
(2003), and Love (2003) also found that capital market Data Analysis
development could weaken the effect of firm cash flow on
firm investment and this effect was higher for more To examine the effect of firm financial constraint on firm
financially constrained firms. Furthermore, financial investment, the study used the Euler equation as the
development can lower the dependence of firms on their baseline empirical model of firm investment. The Euler
internal finance and the more financially constrained firms equation has been applied in many papers because the
will experience greater effects from financial development
compared with less constrained ones, which already have
less difficulty in finding external funding sources. Arbelaez 1
The latest financial development indicator data are until 2015 (last
and Echavarria (2002), Galindo et al. (2007), and Harris updated June 2017).

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
4 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12

Table 1
Summary statistics for study variables from 1999Q1 to 2015Q4

Data Mean Min Max SD

Panel A: total sample of firms in Thailand (490 firms)

Ratio of firms' investment and capital stock (I/K) 11.4256 0.0225 56,842.7000 553.1700
Output to capital stock (Y/K) 4.9394 0.7108 8,887.6000 69.8210
Cash flow to capital ratio (C/K) 6.2514 0.8172 42,026.1000 331.6497
Debt to capital ratio (D/K) 5.5009 1.5557 21,363.1000 187.7971
Panel B: different industrial sectors in Thailand
Agricultural and food industry (100 firms)
Ratio of firms' investment and capital stock (I/K) 8.3129 0.0000 19,223.9000 383.0241
Output to capital stock (Y/K) 7.6627 0.7044 3,874.1400 65.8844
Cash flow to capital ratio (C/K) 5.0811 0.0001 9,248.2900 177.3731
Debt to capital ratio (D/K) 3.4390 1.6921 1555.2700 36.5090
Natural resource industry (100 firms)
Ratio of firms' investment and capital stock (I/K) 4.3308 0.0000 349.1490 32.8608
Output to capital stock (Y/K) 2.3243 0.0035 58.01240 5.8261
Cash flow to capital ratio (C/K) 1.9403 0.0034 991.8490 24.7667
Debt to capital ratio (D/K) 4.9256 0.1071 311.2950 28.5571
Technological industry (100 firms)
Ratio of firms' investment and capital stock (I/K) 2.4721 0.0000 630.3760 17.3300
Output to capital stock (Y/K) 5.4676 0.0000 8,887.6000 170.4561
Cash flow to capital ratio (C/K) 4.5159 0.1679 42,013.6000 329.2385
Debt to capital ratio (D/K) 2.6369 0.0000 174.7950 14.1758
Services (100 firms)
Ratio of firms' investment and capital stock (I/K) 29.8587 0.0000 56,842.7000 1,112.1950
Output to capital stock (Y/K) 10.6869 0.7108 1,632.9200 46.2669
Cash flow to capital ratio (C/K) 18.7252 0.0000 42,026.1000 695.3333
Debt to capital ratio (D/K) 2.2742 0.0191 482.5650 22.0976
Industrial goods (100 firms)
Ratio of firms' investment and capital stock (I/K) 3.8774 0.0225 3,463.5000 73.2998
Output to capital stock (Y/K) 2.5070 0.3560 746.7090 19.8298
Cash flow to capital ratio (C/K) 2.1600 0.5540 25.1675 2.9784
Debt to capital ratio (D/K) 5.7619 0.1071 311.2950 28.5571
Consumer goods (100 firms)
Ratio of firms' investment and capital stock (I/K) 1.2606 0.0140 81.6472 4.5695
Output to capital stock (Y/K) 2.3375 0.6082 24.2801 2.8477
Cash flow to capital ratio (C/K) 1.2164 1.4343 2,842.95 54.5282
Debt to capital ratio (D/K) 4.4419 0.0000 155.7400 14.0713
Real estate and construction industry (100 firms)
Ratio of firms' investment and capital stock (I/K) 10.4152 0.0000 2,469.7000 64.1231
Output to capital stock (Y/K) 4.0155 0.0000 2.3989 0.2164
Cash flow to capital ratio (C/K) 2.7089 0.0008 1,576.0900 24.0891
Debt to capital ratio (D/K) 14.3315 0.0000 21,363.1000 318.1233
Panel C: financial development indicators (1999Q e 2015Q4)
Combination of the depository banks' assets to total financial assets 165.8088 123.9060 226.3840 25.6230
and stock market capitalization to GDP (FD1)
Combination of the private credit by depository banks to GDP ratio 151.8995 119.4970 196.4130 21.8702
and stock market capitalization to GDP (FD2)

Tobin q model, which was previously used to estimate the where i is the number of firms (1, 2, 3, … N); t is the time
investment model, has a measurement problem as the q period (1, 2, 3, … T); k is the number of lags (1e4); ni is the
value used in the model is correct only when there is per- individual firm's fixed effect; ht is the time dummy; εit is the
fect competition in the production market, fixed capital error term; (I/K) is the firm's investment to capital ratio,
homogeneity, and no relationship between firm financial where I is the firm investment, and K is the capital stock. I is
structure and investment decisions (Agca & Mozumdar, calculated from It ¼ At  At1 þ DEPt , where A is the net
2008; Rungsomboon, 2005). These are quite limiting as- fixed asset and DEP is the firm's depreciation; (Y/K) is the
sumptions and thus the Tobin q model is not a suitable output to capital stock ratio; (C/K) is the cash flow to capital
proxy for estimation. Therefore, this paper used the Euler ratio; and (D/K) is the debt to capital ratio. From Eq. (1), the
equation (Eq. (1)) for the estimation as has been done in lag ratio of firm investment to capital ratio is expected to
several other papers (Bond & Meghir, 1994a, 1994b): have a positive relationship with the ratio of firm invest-



2
 ment to capital ratio (a1 > 0). According to Bond and
I I I Y Meghir (1994a, 1994b), the coefficient of (I/K)2 in the
¼ a1 þ a2 þ a3
K i;t K i;tk K i;tk K i;tk Euler equation is expected to be negative (a2 ˂ 0). The co-


2 efficient of output to capital stock (Y/K) and the cash flow to
C D capital ratio (C/K) are also expected to be positive (a3 ,
þ a4 þ a5 þ ni þ ht þ εit (1)
K i;tk K i;tk a4 > 0) as a rise in firm output and cash flow will lead to a
better balance sheet condition of firms, increasing their

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12 5

investment (Bond et al., 1997; Rungsomboon, 2005). obtain external funds. This leads to better firm financial
However, the coefficient of the debt to capital ratio (D/K)2 is condition and increases investment. Moreover, greater firm
expected to be negative (a5 < 0), as a higher debt ratio for a cash flow will support higher firm creditworthiness as well
firm will represent a higher leverage ratio and more as a higher level of internal funds. This condition can in-
financial constraint in terms of default risk. This causes a crease firm investment (Butzen et al., 2001; Kaplan &
reduction in firm investment (Arellano, Bai, & Zhang, 2012; Zingales, 1997). This result is also supported by several
Guariglia, 1999). Eq. (1) is estimated by applying First empirical studies (Angelopoulou & Gibson, 2007; Chatelain
Difference-GMM estimation based on Arellano and Bond et al., 2003; Chatelain & Tiomo, 2001; Rungsomboon,
(1991) and also uses System-GMM estimation as the 2005). The coefficient of debt to capital ratio was signifi-
robustness test. For the study of the effect of financial cantly negative. This is in line with expectations, as higher
development on the way in which financial constraint of leverage of firms will show higher financial constraint,
firms affects firm investment, the model is shown in Eq. (2): making it difficult for firms to find external funding. In



2

 addition, higher leverage will present a greater possibility
I I I Y C of the default risk of a firm, causing a rise in external
¼a1 þ a2 þ a3 þ a4
K i;t K i;tk K i;tk K i;tk K i;tk financing costs and thus lowering firm investment (Agung

2 
  et al., 2002; Angelopoulou & Gibson, 2007). Similar results
D C
þ a5 þ a6  FD were reported by Guariglia (1999), and Gilchrist and
K i;tk K i;tk Himmelberg (1995). The results from System-GMM in
"
 #
2
D column (2) are similar to those in column (1), confirming
þ a7  FD þ ni þ ht þ εit ð2Þ the robustness of the methodology used in the study.
K
i;tk
Table 2 presents the results of the effect of financial
where FD is the financial development indicators including constraint on firm investment and effect of financial
banking sector and capital market development, based on development on the way in which financial constraint af-
Beck and Levine (2002). In this case, two main indicators fects firm investment.
are used: FD1 is a combination of the depository bank's
assets to total financial assets and stock market capitali- Results of the Effect of Financial Development on the Way in
zation to GDP, measuring financial development in terms of Which Firm Financial Constraint Affects Firm Investment
size; and FD2 is the combination of the private credit by
depository banks to GDP ratio and stock market capitali- The effect of financial development is shown in Table 2,
zation to GDP, measuring financial development in term of columns (3)e(6). The results show that the effect of firm
activities. An increase in these financial development in- financial constraint on firm investment remains the same.
dicators shows an expansion in size and activities, such as The results from the First Difference-GMM estimation in
lending services and trading, in the financial institution and columns (3) and (5) show that financial development had a
capital market. This results in a rise in the liquidity of the significant effect on firm investment and the way that firm
financial market and thus increases the opportunity for financial constraint affects investment. The coefficients of
firms to obtain external funding sources. This leads to less (C/K)  FD1 and (D/K)2  FD1 showed statistically signifi-
dependence on internal finances for firm investment. cant negative and positive results, respectively, for the ef-
Therefore, the coefficients of (C/K)  FD and (D/K)2  FD are fect of financial development in terms of size (FD1). This
expected to be negative and positive respectively. In this demonstrates that financial development in terms of size
case, we will estimate the model in Eq. (2) by using FD1 and will lead to a larger size in the banking sector, financial
FD2 using First Difference-GMM and System-GMM esti- institution, and capital market. This results in higher
mation, respectively. The robustness test of Eqs. (1) and (2) liquidity in the financial market and a greater opportunity
was performed by dividing the sample into seven sub- for firms to find additional external funding sources. Ac-
samples, representing the seven different industrial sec- cording to Arbela ez and Echavarria (2002) and Harris et al.
tors in Thailand. (1994), this situation leads to a rise in firm investment and
a lower dependence of firms on their financial condition
(cash flow and leverage) due to firms being able to find
Results and Discussion other sources to fund their investment instead of using
their internal funds. Therefore, this indicator will lower the
Results of the Effect of Firm Financial Constraint on Firm effect of firm financial constraint (cash flow and leverage)
Investment on firm investment. Our results are in line with expecta-
tions and previous studies (Arbela ez & Echavarria, 2002;
The empirical results of the effect of financial constraint Harris et al., 1994; Laeven, 2003). The coefficients of (C/
on firm investment are shown in Table 2. The results from K)  FD2 and (D/K)2  FD2 also showed statistically sig-
the First Difference-GMM estimation in column (1) show nificant negative and positive results, respectively, for the
that the financial constraint of firms had a significant effect effect of financial development in terms of activities (FD2).
on firm investment in Thailand. The coefficients of the This indicates that an increase in the activities of the
output to capital ratio and of the cash flow to capital ratio banking sector and capital market, such as an extension of
were statistically significant and positive. This is in line banking services and financial market trading, will lead to
with expectations, as the higher output and cash flow of greater liquidity and trading activities through the financial
firms will result in greater liquidity and ability for firms to market. This causes a greater opportunity for a firm to

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
6 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12

Table 2
Empirical results of the effect of financial constraint and financial development on firm investment

Variable (1) (2) (3) (4) (5) (6)

GMM System-GMM GMM System-GMM GMM System-GMM

(I/K)
(t-1) 0.7178* 0.6130* 0.4552 0.6676 0.4277 0.6803*
(0.3844) (0.3673) (0.3811) (0.4631) (0.3757) (0.4101)
(t-2) 0.5943** 0.6741 0.7674* 0.9805 0.8343* 0.9650**
(0.2638) (0.6456) (0.4255) (0.6135) (0.4498) (0.4798)
(t-3) 0.6617* 0.5476 0.8476*** 0.9422**** 0.8396 0.9174***
(0.3399) (0.3.938) (0.3197) (0.3301) (0.6476) (0.2810)
(t-4) 0.4791 0.4234*** 0.1821 0.4339**** 0.3245 0.4136***
(0.2153) (0.1406) (0.2688) (0.1469) (0.2815) (0.1324)
(I/K)2
(t-1) 0.0008* 0.0001 0.0001 0.0002 0.0003 0.0002
(0.0004) (0.0001) (0.0002) (0.0002) (0.0003) (0.0002)
(t-2) 0.0002 0.0001 0.0006 0.0004* 0.0009** 0.0005**
(0.0001) (0.0002) (0.0004) (0.0002) (0.0003) (0.0002)
(t-3) 0.0001 0.0001 0.0007 0.0004 0.0007 0.0005***
(0.0002) (0.0001) (0.0004) (0.0003) (0.0005) (0.0001)
(t-4) 0.0002* 0.0001*** 0.0000 0.0001** 0.0002 0.0001**
(0.0001) (0.0000) (0.0003) (0.0004) (0.0002) (0.0000)
(Y/K)
(t-1) 0.6658* 0.5710* 0.1042 0.6477*** 0.1219 0.6897***
(0.3992) (0.3079) (0.2446) (0.2027) (0.2216) (0.2339)
(t-2) 0.3869 0.2224 0.0014 0.5593** 0.0681 0.6136***
(0.4820) (0.6021) (0.4318) (0.2155) (0.4226) (0.2271)
(t-3) 0.1722 0.1626 0.1169 0.3476*** 0.1573 0.4006***
(0.4262) (0.1655) (0.4574) (0.1222) (0.4399) (0.1246)
(t-4) 0.1043 0.1235 0.1682 0.2272*** 0.2343 0.2642
(0.6509) (0.1169) (0.3223) (0.0804) (0.3131) (0.2065)
(C/K)
(t-1) 1.3134 0.4332** 1.0652 1.1010 2.0543 0.5495**
(1.1355) (0.1816) (0.9686) (0.9567) (1.7054) (0.2346)
(t-2) 1.7734* 0.2335 0.1558 1.2367* 0.3265 0.1366
(0.9582) (0.5640) (0.4918) (0.6559) (0.4065) (0.3175)
(t-3) 0.8024 0.0829 0.4799 0.8045 1.2565 0.5025
(0.8206) (0.4000) (0.5371) (0.6284) (0.8410) (0.6589)
(t-4) 1.2934 0.0972 1.5168* 1.2727* 1.2256*** 0.1395
(0.8776) (0.2898) (0.8803) (0.7247) (0.4616) (0.3143)
(D/K)
(t-1) 0.0013 0.0001 0.0161** 0.0040 0.0145** 0.0030
(0.0021) (0.0013) (0.0066) (0.0085) (0.0057) (0.0083)
(t-2) 0.0021* 0.0020 0.0011 0.0069 0.0016 0.0073
(0.0011) (0.0017) (0.0064) (0.0069) (0.0061) (0.0055)
(t-3) 0.0014 0.0024* 0.0084 0.0753*** 0.0107 0.0131**
(0.0013) (0.0013) (0.0114) (0.0274) (0.0103) (0.0053)
(t-4) 0.0011 0.0015*** 0.0215* 0.0607*** 0.0235** 0.0059*
(0.0012) (0.0005) (0.0111) (0.0171) (0.0094) (0.0034)
(C/K)  FD1
(t-1) 0.0023 0.0449***
(0.0405) (0.0169)
(t-2) 0.0222 0.0347*
(0.0334) (0.0205)
(t-3) 0.0911* 0.0753
(0.0538) (0.1274)
(t-4) 0.0464 0.0607***
(0.0447) (0.0107)
(D/K)  FD1
(t-1) 0.0001*** 0.0000
(0.0000) (0.0000)
(t-2) 0.0000 0.0000
(0.0000) (0.0000)
(t-3) 0.0000 0.0006*
(0.0001) (0.0000)
(t-4) 0.0001** 0.0000
(0.0001) (0.0000)
(C/K)  FD2
(t-1) 0.0041 0.0408**
(0.0501) (0.0167)
(t-2) 0.0241 0.0281
(0.0397) (0.0171)

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12 7

Table 2 (continued )

Variable (1) (2) (3) (4) (5) (6)

GMM System-GMM GMM System-GMM GMM System-GMM

(t-3) 0.0922* 0.0620**

(0.0513) (0.0262)
(t-4) 0.0796 0.1585
(0.0549) (0.1155)
(D/K)2  FD2
(t-1) 0.0000 0.0000
(0.0000) (0.0000)
(t-2) 0.0000 0.0000
(0.0000) (0.0000)
(t-3) 0.0001* 0.0001**
(0.0001) (0.0000)
(t-4) 0.000 0.0000
(0.0001) (0.0000)
Hansan test 265.78 271.96 189.60 189.08 254.50 255.19

Notes: Columns (1)e(2) show the results of the effect of financial constraint on firm investment, columns (3)e(4) show the results of the effect of financial
development in terms of size of financial institution and capital market on firm investment, and columns (5)e(6) present the results of the effect of financial
development in terms of the financial institution and capital market on firm investment. The estimation method are First Difference-GMM estimation
(GMM) shown in columns (1), (3), and (5) and System-GMM estimation shown in columns (2), (4), and (6). I/K is the ratio of firm investment to capital in
which I is calculated from It ¼ Kt  Kt1 þ DEPt , where K is net fixed assets and DEP is the depreciation. Y/K is the output to capital stock ratio, C/K is the cash
flow to capital stock ratio, and D/K is the debt to capital ratio, FD1 is the combination of the depository bank's assets to total financial assets and stock market
capitalization to GDP, FD2 is the combination of the private credit by depository banks to GDP ratio and stock market capitalization to GDP. Symbols *, **, ***
indicate that a coefficient is statistically significant at levels of 10%, 5%, and 1%, respectively.

obtain more funding sources, such as from the financial capital was in the firms in the customer goods sector (about
market and financial institutions as well as lowering the 1.21), while the highest ratio was in the service sector
cost of external funds. Thus, this condition will weaken the (about 18.72). This was followed by the agricultural and
effect of firm financial constraint on investment as firm food industry, technology, real estate and construction,
investment will depend more on external funds causing by industrial goods, and natural resources (1.94). This shows
an increase in financial development, instead of depending that the effect of financial constraint on firm investment
on the firm internal financial condition (cash flow and will become higher particularly in firms with a weaker
leverage of firms) (Arbela ez & Echavarria, 2002; Islam & balance sheet condition or in more financially constrained
Mozumdar, 2007; Love, 2003). Thus, this financial devel- firms which have a relatively low cash flow to capital ratio.
opment in terms of activities will weaken the effect of firm According to Gaiotti and Generale (2001) and Oliner and
financial constraint on investment. Similar results were Rudebusch (1996), this is because these firms have a
also found in Arbelaez and Echavarria (2002), Harris et al. lower liquidity condition and thus higher external funding
(1994), Islam and Mozumdar (2007), and Love (2003). costs, relative to firms with a better balance sheet condi-
Estimating the model using the System-GMM technique in tion. This therefore increases their dependence on internal
columns (4) and (6) produced results that were similar to finance and raises the effect of firm cash flow on invest-
those in the First Difference-GMM estimation. ment. Regarding the effect of the firm leverage ratio on firm
investment, the results in Table 3 show that the coefficient
Robustness Test of debt to capital ratio remained significantly negative,
especially for the real estate and construction sector at
The robustness test was performed by dividing the total about 0.025, followed by the industrial goods sector,
sample of firms into seven different industrial sectors in natural resources, the consumer goods sector, technology,
Thailand in order to examine whether the results were the agricultural and finally by the food industry sector and
different in terms of the different industrial sectors. The service sector, which had the lowest value (0.0002). From
empirical results of the effect of firm financial constraint on Table 1, panel B, the leverage ratio of the firms in the real
investment are shown in Table 3 for the different GMM estate and construction sector was the highest at 14.33,
estimations. Table 3 shows that the effect of firm financial while in the service sector it was the lowest at 2.27. This
constraint on investment is different among the industrial ratio was followed by the industrial goods sector, natural
sectors. The coefficient of cash flow to capital ratio still had resources sector, consumer goods industry, agricultural and
a significant positive effect on firm investment and this food industry, and technological industry at 2.63. Thus, the
effect was relatively high in the customer goods sector with effect of the firm leverage ratio on firm investment will
a coefficient of 1.53, followed by the industrial sector, nat- become greater in firms with a weaker balance sheet con-
ural resources, technology, real estate and construction, the dition, as such firms have a relatively high leverage ratio
agricultural and food industry, and the service sector, with because higher firm leverage will result in greater financial
a coefficient of 0.008. These results showed that the effect constraint in terms of a higher default risk, causing diffi-
of financial constraint on firm investment can vary culties for firms to find external funds (Agung et al., 2002;
depending on the financial condition in each industrial Guariglia, 1999). As a result, these firms need to depend
sector. From Table 1, panel B, the lowest ratio of cash flow to more on their internal funds and there is a more

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
8 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12

Table 3
Effect of firm financial constraint on firm investment after dividing the sample into different industrial sectors (First Difference-GMM estimation)

Variable/Industrial Agriculture Natural Technology Services Industrial Consumer Real estate and
sector and food resources goods goods construction

(1) (2) (3) (4) (5) (6) (7)

GMM GMM GMM GMM GMM GMM GMM

(I/K)
(t-1) 1.4598*** 1.2367*** 1.1971** 1.0422*** 1.9674*** 0.6021*** 0.5183***
(0.2256) (0.1469) (0.5245) (0.2664) (0.8016) (0.2076) (0.0513)
(t-2) 0.2618 2.1848*** 0.1771 0.0487 1.1586 0.0522 1.1614***
(0.1972) (0.4339) (0.2621) (0.1438) (1.1227) (0.0792) (0.4362)
(t-3) 0.2694*** 0.8258 0.5602* 0.2948*** 0.2288 0.0072 0.9600***
(0.0657) (0.6072) (0.3264) (0.0712) (1.5996) (0.1404) (0.2636)
(t-4) 0.0779* 0.1692 0.4145 0.0922 2.0104*** 0.0769 0.3912**
(0.0461) (0.2785) (0.4225) (0.0556) (0.7812) (0.1228) (0.1781)
(I/K)2
(t-1) 0.0242*** 0.0023*** 0.0018 0.0025 0.0026** 0.0169 0.0001
(0.0059) (0.0006) (0.0036) (0.0020) (0.0011) (0.0134) (0.0001)
(t-2) 0.4465 0.0043*** 0.0007 0.0015 0.0004 0.0038 0.0001***
(0.4548) (0.0001) (0.0016) (0.0010) (0.0014) (0.0038) (0.0001)
(t-3) 0.2091 0.3719 0.0033* 0.0026*** 0.0003 0.0068 0.0006***
(0.1698) (0.3716) (0.0019) (0.0001) (0.0004) (0.0114) (0.0001)
(t-4) 0.0034*** 0.1099*** 0.0054** 0.0033** 0.0009*** 0.0095* 0.0004***
(0.0011) (0.2938) (0.0024) (0.0014) (0.0001) (0.0053) (0.0001)
(Y/K)
(t-1) 0.0131* 0.1557 0.0813 0.0171 0.1899 0.0416 0.0777
(0.0065) (0.2698) (0.1134) (0.0241) (1.4105) (0.0365) (0.1369)
(t-2) 0.0107* 0.3731 0.0569 0.0077 1.8129 0.0481* 0.3192
(0.0055) (0.3716) (0.0887) (0.0089) (2.0323) (0.0272) (0.2932)
(t-3) 0.0119* 0.0022** 0.0365 0.0003 0.5492 0.0591** 0.1537*
(0.0059) (0.0001) (0.0693) (0.0197) (0.6704) (0.0286) (0.0807)
(t-4) 0.0077* 0.0009*** 0.0702 0.0017 0.0261 0.0538** 0.2462*
(0.0042) (0.0002) (0.1029) (0.0086) (0.4180) (0.0251) (0.1247)
(C/K)
(t-1) 0.0401 0.3757* 0.5900 0.0785 0.5131** 0.2974 0.3062***
(0.0329) (0.1926) (0.6467) (0.0921) (0.2547) (0.2303) (0.0991)
(t-2) 0.0141** 0.3140 1.4075 0.0141*** 1.107 1.5369*** 0.3694**
(0.0078) (0.3841) (0.9812) (0.0047) (1.0720) (0.2284) (0.1635)
(t-3) 0.0848 0.1949 0.4166*** 0.0083*** 0.4154 0.4931 0.1583
(0.0621) (0.1531) (0.1377) (0.0017) (0.3155) (0.5072) (0.1068)
(t-4) 0.0452* 0.4521 0.2224 0.2061 0.6511 0.9718*** 0.2871**
(0.0244) (0.5875) (0.2521) (0.1569) (0.9141) (0.2938) (0.1091)
(D/K)2
(t-1) 0.0000 0.0040 0.0016 0.0001 0.0431* 0.0009 0.0251***
(0.0006) (0.0030) (0.0028) (0.0001) (0.0230) (0.0005) (0.0039)
(t-2) 0.0005*** 0.0062 0.0016 0.0002** 0.0185** 0.0009* 0.0103
(0.0002) (0.0190) (0.0019) (0.0001) (0.0071) (0.0003) (0.0223)
(t-3) 0.0012 0.0031 0.0032** 0.0001 0.0004 0.0001 0.0024
(0.0007) (0.0003) (0.0014) (0.0000) (0.0011) (0.0005) (0.0049)
(t-4) 0.0004 0.0036** 0.0023 0.0000 0.0074*** 0.0007 0.0145***
(0.0003) (0.0016) (0.0021) (0.0001) (0.0022) (0.0007) (0.0028)
Hansen test 115.28 196.55 200.34 75.95 99.58 25.14 83.14

Notes: Estimation using First Difference-GMM estimation (GMM). I/K is the ratio of firm investment to capital in which I is calculated from
It ¼ Kt  Kt1 þ DEPt , where K is the net fixed assets and DEP is the depreciation. Y/K is the output to capital stock ratio, C/K is the cash flow to capital stock
ratio, and D/K is the debt to capital ratio. Symbols *, **, *** indicate that a coefficient is statistically significant at levels of 10%, 5%, and 1%, respectively.

pronounced effect of the firm leverage on firm investment different industrial sectors shows that the effect of financial
in the more financially constrained firms than the less development on firm investment varies according to the
financially constrained ones.2 industrial sector. From Tables 4 and 5, using the First
Table 3 present the results of the effect of financial Difference-GMM estimation,3 the coefficients of (C/
constraint on firm investment after dividing the sample K)  FD1 and (C/K)  FD2 were still significantly negative
into different industrial sectors shown in Columns (1)e(7). and relatively high in the industrial goods sector, at about
The empirical results for the effect of financial devel- 0.31 and 0.49, respectively, followed by the natural
opment on firm investment when dividing the sample into resource industry, consumer goods, real estate and

2 3
The results from System-GMM estimation were also similar to those The results from the System-GMM estimation were also similar to
using the First Difference-GMM estimation. those using First Difference-GMM estimation.

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12 9

Table 4
Effect of financial development in terms of size (FD1) on firm investment after dividing the sample into different industrial sectors (First Difference-GMM
estimation)

Variable/ Agriculture and food Natural resources Technology Services Industrial goods Consumer goods Real estate and construction
industrial
(1) (2) (3) (4) (5) (6) (7)
sector
GMM GMM GMM GMM GMM GMM GMM

(I/K)
(t-1) 2.4266 0.1514 0.3583 0.0379 1.6667*** 0.0726** 0.8565***
(1.5947) (0.4098) (0.4044) (0.0859) (0.6264) (0.2972) (0.2663)
(t-2) 1.0146 0.4675 0.8352** 0.2474*** 0.7519*** 0.0768 0.0291
(0.9532) (0.4451) (1.4009) (0.0623) (0.2591) (0.1290) (0.1638)
(t-3) 0.8926 0.4605 0.3904 0.0137 0.8681** 0.0111 0.5364***
(0.6643) (0.4594) (0.3277) (0.0812) (0.4082) (0.1404) (0.1391)
(t-4) 2.1852* 1.0189*** 0.4517 0.0249 0.8915 0.3884*** 0.1202
(1.1347) (0.3235) (0.7264) (0.2501) (0.5773) (0.1265) (0.1291)
(I/K)2
(t-1) 1.4230 0.0001 0.0021 0.0018 0.0552** 0.0308* 0.0032**
(1.0738) (0.0011) (0.0024) (0.0018) (0.0145) (0.0156) (0.0014)
(t-2) 1.0789 0.0034** 0.0055*** 0.0019 0.0222* 0.0092 0.0004
(1.0577) (0.0012) (0.0021) (0.0011) (0.0127) (0.0066) (0.0024)
(t-3) 0.8838 0.0008 0.0014 0.0031*** 0.0267 0.0149* 0.0030
(0.9602) (0.0009) (0.0019) (0.0011) (0.0161) (0.0078) (0.0025)
(t-4) 0.2730 0.0001 0.0003 0.0021 0.0231 0.0093* 0.0027
(0.5549) (0.0001) (0.0037) (0.0024) (0.0148) (0.0054) (0.0019)
(Y/K)
(t-1) 0.2729** 0.0938* 0.0671 0.0022 0.0363*** 0.0011 0.9748**
(0.1247) (0.0525) (0.1120) (0.0151) (0.0120) (0.0584) (0.4778)
(t-2) 0.1893* 0.2013 0.0312 0.0038 0.0115 0.0387 0.8731*
(0.9609) (0.2273) (0.0577) (0.0144) (0.0347) (0.0461) (0.4643)
(t-3) 0.2275** 0.1644 0.0149*** 0.0276*** 0.0128 0.03897 0.3734
(0.1074) (0.2078) (0.0061) (0.0101) (0.0250) (0.0491) (0.3025)
(t-4) 0.1708* 0.1140 0.0353 0.0133** 0.0097 0.0386 0.5488
(0.9929) (0.1493) (0.0607) (0.0059) (0.0100) (0.0460) (0.3853)
(C/K)
(t-1) 1.0743 1.2071** 1.2615 0.4034** 1.0336 1.8409** 0.0284
(1.6215) (0.4989) (1.9525) (0.1980) (1.3163) (0.9513) (3.5401)
(t-2) 1.4865 1.2180 1.0349** 0.0305 0.1475 1.1148 1.7366
(1.3561) (0.9045) (0.5658) (0.0555) (1.6551) (1.5383) (2.3527)
(t-3) 0.8410** 0.4215 1.6189 0.03566 1.7306*** 1.4932 0.4384
(0.4697) (0.4327) (1.8417) (0.2854) (0.6324) (4.7226) (2.7712)
(t-4) 1.0105 0.0027 1.9243 0.0661 1.692 4.0590 1.0784***
(0.6294) (0.0528) (1.1521) (0.1669) (1.3412) (3.2918) (0.5746)
(D/K)2
(t-1) 0.0202*** 0.0393 0.0426 0.0069 0.5210 0.0031 0.9008**
(0.0073) (0.0488) (0.0299) (0.0174) (0.4739) (0.0035) (0.3621)
(t-2) 0.0160*** 0.0935* 0.0065 0.0146** 0.0519 0.0021 0.1663
(0.0049) (0.0525) (0.0134) (0.0063) (0.0808) (0.0023) (0.2557)
(t-3) 0.0156 0.0321 0.0237 0.0063 0.1074 0.0003 0.6886
(0.0181) (0.0376) (0.0184) (0.0151) (0.0865) (0.0006) (0.4161)
(t-4) 0.0006 0.0676** 0.0197* 0.0048 0.1927* 0.1125* 1.5986*
(0.0017) (0.0292) (0.0113) (0.0072) (0.1113) (0.0560) (0.9272)
(C/K)  FD1
(t-1) 0.0107* 0.0001 0.0021 0.0020** 0.3151* 0.0676* 0.0071
(0.0059) (0.0451) (0.0408) (0.0010) (0.1798) (0.0343) (0.0195)
(t-2) 0.0021 0.1129* 0.0395* 0.0001 0.2268 0.0706 0.0136
(0.0082) (0.0605) (0.0290) (0.0002) (0.2387) (0.0485) (0.0126)
(t-3) 0.0263*** 0.0098 0.0029 0.0018 0.0233 0.0084 0.0233
(0.0073) (0.0489) (0.0414) (0.0015) (0.0720) (0.0287) (0.0139)
(t-4) 0.0098 0.0632 0.0104 0.0002 0.1666** 0.0032 0.1028***
(0.0076) (0.0561) (0.0246) (0.0008) (0.0773) (0.0200) (0.0268)
(D/K)2  FD1
(t-1) 0.0029 0.0002 0.0001*** 0.0005 0.0048** 0.0000 0.0002
(0.0024) (0.0002) (0.0000) (0.0008) (0.0019) (0.0001) (0.0001)
(t-2) 0.0001 0.0005* 0.0001*** 0.0037** 0.0013 0.0001* 0.0000
(0.0004) (0.0002) (0.0000) (0.0017) (0.0011) (0.0000) (0.0001)
(t-3) 0.0006 0.0001 0.0001* 0.0006 0.0038** 0.0000 0.0001
(0.0005) (0.0002) (0.0000) (0.0008) (0.0021) (0.0001) (0.0001)
(t-4) 0.0012* 0.0003** 0.0000 0.0022** 0.0080* 0.0000 0.0001*
(0.0006) (0.0001) (0.0000) (0.0011) (0.0044) (0.0000) (0.0001)
Hansen test 227.62 133.65 256.36 79.32 129.79 220.68 116.50

Notes: Estimation uses First Difference-GMM estimation (GMM). I/K is the ratio of firm investment to capital in which I is calculated from
It ¼ Kt  Kt1 þ DEPt , where K is the net fix asset and DEP is the depreciation. Y/K is the output to capital stock ratio, C/K is the cash flow to capital stock ratio,
and D/K is the debt to capital ratio. FD1 is the combination of the depository banks'assets to total financial assets and stock market capitalization to GDP.
Symbols *, **, *** indicate that a coefficient is statistically significant at levels of 10%, 5%, and 1%, respectively.

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
10 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12

Table 5
Effect of financial development in terms of activities (FD2) on firm investment after dividing the sample into different industrial sectors (First Difference-
GMM estimation)

Variable/ Agriculture and food Natural resources Technology Services Industrial goods Consumer goods Real estate and construction
industrial
(1) (2) (3) (4) (5) (6) (7)
sector
GMM GMM GMM GMM GMM GMM GMM

(I/K)
(t-1) 1.375*** 0.8576 0.5783** 0.9205*** 1.2761*** 0.8097** 0.7648***
(0.2179) (0.5770) (0.2348) (0.2773) (0.4037) (0.3106) (0.1890)
(t-2) 0.3892 1.2313* 1.1209 0.1258 1.9056* 0.0242 0.0533
(0.2397) (0.6714) (1.4679) (0.1519) (1.0235) (0.1145) (0.2103)
(t-3) 0.0506 0.4591 0.6219 0.2608*** 2.3963** 0.0144 0.5604***
(0.1204) (0.5561) (0.4649) (0.0932) (0.9963) (0.1481) (0.1388)
(t-4) 0.0904 0.2126 0.4620 0.0302 2.3306 0.4144*** 0.0979
(0.0846) (0.2221) (0.7964) (0.2518) (1.5566) (0.1378) (0.1607)
(I/K)2
(t-1) 0.0267*** 0.0002* 0.0005 0.0017 0.0029** 0.0342** 0.0003
(0.0070) (0.0013) (0.0021) (0.0019) (0.0013) (0.0163) (0.0002)
(t-2) 0.0163*** 0.0016 0.0064 0.0018 0.0015 0.0093 0.0003
(0.0056) (0.0017) (0.0078) (0.0012) (0.0014) (0.0059) (0.0002)
(t-3) 0.0043 0.0011 0.0033 0.0027** 0.0023* 0.0147* 0.0004**
(0.0124) (0.0016) (0.0027) (0.0010) (0.0013) (0.0078) (0.0002)
(t-4) 0.0011 0.0014 0.0006 0.0020 0.0004 0.0126** 0.0001
(0.0017) (0.0001) (0.0032) (0.0026) (0.0004) (0.0059) (0.0001)
(Y/K)
(t-1) 0.0644 0.0166 0.1041 0.0420* 0.0782 0.0119 0.9427**
(0.0428) (0.2001) (0.1196) (0.0248) (2.0046) (0.0592) (0.4478)
(t-2) 0.0784* 0.0644 0.3383 0.0239 0.1920 0.0334 0.8435*
(0.0402) (0.1649) (0.0469) (0.0342) (0.6740) (0.0471) (0.4625)
(t-3) 0.0827 0.2839* 0.0172 0.0254 0.7949 0.0331 0.3303
(0.0521) (0.1624) (0.0403) (0.0221) (0.6675) (0.0491) (0.2735)
(t-4) 0.0681* 3.5382 0.0530 0.0308** 0.5285 0.0278 0.5534
(0.0324) (0.2585) (0.0574) (0.0158) (0.7742) (0.0469) (0.3898)
(C/K)
(t-1) 1.8369 1.7314 1.5932 0.7063** 1.2970* 1.8856 0.8187
(2.6439) (0.7846) (1.4569) (0.3283) (0.6942) (1.7319) (1.5053)
(t-2) 0.2943 1.1915 1.3035*** 0.1733 1.4529 0.6138 1.1667*
(1.9805) (1.1174) (0.0607) (0.1719) (1.6829) (1.7946) (0.5545)
(t-3) 4.5526 1.7935 1.8031 0.9115 2.9536 1.2469*** 0.1912
(3.1471) (1.3655) (1.9542) (0.8119) (12.7221) (0.6140) (1.1952)
(t-4) 0.8263** 0.0682** 0.7010 0.02162 2.2673** 1.2552*** 1.5229
(0.4197) (0.0316) (1.2436) (0.6348) (1.1265) (0.6584) (1.0642)
(D/K)2
(t-1) 0.1285* 0.0039 0.0078 0.0106 0.0148*** 0.7145 0.0952
(0.0718) (0.0155) (0.0082) (0.0422) (0.0045) (0.4962) (0.1262)
(t-2) 0.2406* 0.0113 0.0042 0.0226 0.0142*** 0.2064 0.5441**
(0.1382) (0.0092) (0.0086) (0.0602) (0.0047) (0.1596) (0.2410)
(t-3) 0.1927 0.0114** 0.0063 0.0209 0.0139** 0.1210 0.0819
(0.1617) (0.0059) (0.0109) (0.0488) (0.0058) (0.0877) (0.0991)
(t-4) 0.2378 0.0427 0.0163 0.0286 0.0015 0.2694 0.4049**
(0.1743) (0.0438) (0.0247) (0.0546) (0.0036) (0.1638) (0.1734)
(C/K)  FD2
(t-1) 0.0485 0.0146 0.0188* 0.0050** 0.4922* 0.0011 0.0534
(0.0643) (0.0199) (0.0100) (0.0019) (0.2546) (0.0449) (0.0526)
(t-2) 0.0122** 0.0047 0.0074 0.0011 0.1969 0.1674* 0.1155
(0.0668) (0.0143) (0.0111) (0.0010) (0.3017) (0.0958) (0.0683)
(t-3) 0.0144 0.0351 0.0293*** 0.0057 0.0662 0.0006 0.0721
(0.0283) (0.0237) (0.0106) (0.0058) (0.1248) (0.0801) (0.0451)
(t-4) 0.0064 0.0505** 0.0263** 0.0012 0.3648** 0.0232 0.0487**
(0.0454) (0.0192) (0.1638) (0.0043) (0.1444) (0.0604) (0.0215)
(D/K)2  FD2
(t-1) 0.0000 0.0048 0.0007* 0.0004 0.0001 0.0000 0.0001***
(0.0001) (0.0031) (0.0003) (0.0001) (0.0002) (0.0001) (0.0000)
(t-2) 0.0020* 0.0012 0.0013* 0.0048** 0.0002** 0.0000* 0.0001***
(0.0001) (0.0011) (0.0007) (0.0021) (0.0001) (0.0001) (0.0000)
(t-3) 0.0000 0.0008 0.0011 0.0009 0.0057 0.0001 0.0000**
(0.0001) (0.0006) (0.0008) (0.0008) (0.0058) (0.0001) (0.0000)
(t-4) 0.0001 0.0010** 0.0011 0.0035** 0.0001 0.0002 0.0000
(0.0001) (0.0005) (0.0008) (0.0014) (0.0003) (0.0002) (0.0000)
Hansen test 120.84 154.30 294.45 93.98 194.45 192.01 158.87

Notes: Estimation used First Difference-GMM estimation (GMM). I/K is the ratio of firm investment to capital in which I is calculated from
It ¼ Kt  Kt1 þ DEPt , where K is the net fixed assets and DEP is the depreciation. Y/K is the output to capital stock ratio, C/K is the cash flow to capital stock
ratio, and D/K is the debt to capital ratio. FD2 is the combination of the private credit by depository banks to GDP ratio and stock market capitalization to GDP.
Symbols *, **, *** indicate that a coefficient is statistically significant at levels of 10%, 5%, and 1%, respectively.

Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010
 A. Lerskullawat / Kasetsart Journal of Social Sciences xxx (2018) 1e12 11

construction industry, technology, agriculture and food negative effect. Financial development also weakened the
industry, and services industry. Moreover, the coefficients effect of firm financial constraint on firm investment, and
of (D/K)2  FD1 and (D/K)2  FD2 were still significantly the effects were considerably higher in the more financially
positive and higher in the industrial goods sector, at 0.008 constrained firms than the less constrained ones. The re-
and 0.0002, respectively, followed by the real estate and sults from the study have some important implications for
construction sector, consumer goods, technology, natural policies in Thailand. As we found that the financial
resources, agriculture and food, and the services sector. constraint of firms can affect firm investment, firms and
These results show that the effect of financial development investors should consider financial structure and condition
will be higher in the more financially constrained firms as important factors in their investment decision. Risk
than the less constrained ones. The financial condition of management of firms should be improved in order to be
firms presented in Table 1, panel B, shows that the firms in well prepared to prevent the possible occurrence of
the industrial goods sector, consumer goods sector, and financial and economic risks, particularly for the more
natural resources sector have a relatively lower cash flow to financially constrained firms. In addition, due to the
capital ratio compared to those in the services sector which significant effect of financial development on the way
have a relatively high cash flow to capital ratio. On the financial condition or constraint of firms affect firm in-
other hand, the firms in the real estate sector and those in vestment, policymakers should consider these effects
the industrial goods sector have a relatively high leverage when preparing new financial development plans in the
ratio compared with other firms in the technology and future (2016e2020). As this study focused on a case study
services sector. This financial condition shows that the in Thailand, future study of this topic could consider a
firms which have more financial constraint will have a group of developing countries, such as the ASEAN coun-
relatively low liquidity condition and a higher cost of tries, in order to obtain results covering other developing
external funds. As a result, the effect of financial develop- countries. Furthermore, further research could extend to
ment will lead to a greater opportunity for these firms to studying the effect of other aspects of financial develop-
obtain external funding sources compared with the less ment, such as financial competition and financial liber-
financially constrained ones, which previously had less alization, on firm investment.
difficulty in finding external funding sources (Gelos &
Werner, 2002; Harris et al., 1994; Laeven, 2003; Love, Conflict of Interest
2003). Therefore, the effect of financial development in
terms of size and activity in the banking and capital market The author declares no conflict of interest.
will result in less dependence for firm investment on in-
ternal funds or financial condition and this effect will be Acknowledgments
higher in the more financially constrained firms.
Table 4 presents the results of the effect of financial The author would like to thank the Department of
development in terms of size (FD1) on the way in which Economics, Faculty of Economics, Kasetsart University,
financial constraint affects firm investment after dividing Bangkok, Thailand for funding support for this research.
the sample into the different industrial sectors shown in
columns (1)e(7). References
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Please cite this article in press as: Lerskullawat, A., Financial development, financial constraint, and firm investment: Evidence
from Thailand, Kasetsart Journal of Social Sciences (2018), https://doi.org/10.1016/j.kjss.2018.01.010