Sensitivity of Investment to Internal Funds and its Impact on Asset Sales and Performance: Case of a Developing Economy


  • Ramla Sadiq
  • Uzma Ehtesham
  • Tahseen Mohsan Khan


Financial Constraints, Capital Expenditure, Asset Sales, Growth Opportunities


This study aims to fulfill three main objective i.e. finding financial constraints using the model that suits Pakistani environment best, determining the impact of asset sales on investment for financially constrained firms and finally determining the impact of investment and asset sales on firm’ performance. Analysis is performed on 223 financially healthy firms for the period of 10 years. This study separates the firms into constrained and unconstrained groups exploiting the techniques of four papers and finds out the best model working in Pakistani environment. Due to the linear relationship and exogeneity of age and size, SA Index is a better alternative. Moreover all the variables of SA Index are statistically significant and well supported by the literature. So, the research accepts hypothesis that SA Index is a better model for financial constraint determination. Applying this model, 98 companies are found to be financially constrained. This paper further investigates the relationship between capital expenditure and proceeds from asset sales. The study gives strong evidence that financial constraints have a significant impact on investment. It therefore, accepts the hypothesis that sales has a significant impact on investment expenditure and that investment decisions of financially constrained firms are sensitive to internal funds. It is also evident that firm’s investment decisions are significantly affected by the firm’s financial constraints. Prior studies on sensitivity of investment also support these evidences. As reported by previous research, this study finds a significant and positive relation between invest decision and firm performance for financially healthy firms. It also finds a positive and significant relation between asset sales and firm performance financially healthy firms.