This paper analyzes the joint impact of the interest rate volatility and debt on firm investment. We derive an investment model taking account of the risk attitude of the owners of the firm. Using a panel of Dutch listed firms in the period of 1984–1995, we find that the cross-effect of the interest rate volatility and debt on investment is positive. This effect is more important for highly indebted firms than for less-indebted firms. The results are robust to different measures for the interest rate volatility. We interpret this finding by the tradeoff between the effect of the interest burden and the effect of debt revaluation.

Using a panel of Dutch listed firms this paper provides empirical evidence for the hypothesis that more risky firms are confronted with more severe capital market constraints than relatively less risky firms. The paper also contributes to the discussion on the usefulness of cash flow as a measure of financial constraints. We present a stochastic version of the Kaplan-Zingales (1997) model. We show that cash flow sensitivity can be used as a meaningful indicator of financing constraints if firms are classified by the degree of uncertainty they face and if the uncertainty originates from cost uncertainty. JEL classification codes: E22, G32.

We examine the empirical relevance of standard theories explaining the motivation of Seasoned Equity Offerings (SEOs) in the Chinese context. Analyzing Chinese SEOs during 1994–2008 and controlling for other factors reflecting features of Chinese corporate finance, we find that Chinese SEOs are mostly motivated by timing the market. Financing for investment and growth receives weak empirical support. We do not obtain any consistent evidence supporting both the tradeoff and the agency theories. In addition, we find that the firm’s SEOs behavior varies between rights issues and public offerings and across different periods along with the progress of China’s market transition. Our results show that Chinese listed firms in general behave similarly as their counterparts in other countries concerning SEOs decisions in that they issue SEOs when there are opportunities to take advantage of market overvaluation. These results are consistent with the well-documented convergence trend of corporate SEOs behavior of firms around the world. In addition, our findings challenge the conventional perception on Chinese SEOs that controlling shareholders use SEOs as a means to expropriate minority shareholders.