Other studies cast doubt on ICFS as a measure of financial constraint by demonstrating that these relationships are particular to firms with only positive internal cash flows or that they change over time (Allayannis and Mozumdar, 2004; Agca and Mozumdar, 2008; Brown and Petersen, 2009; Chen and Chen, 2012).
We expect MQP to be embedded in the organizational capital of the firm and, as such, to affect ICFS through two important channels: 1) information asymmetry and 2) agency costs.
Given that good managers tend to be associated with better managerial practices, forward-thinking managerial style, and optimizing behavior, they are likely to face fewer financing frictions leading to a lower degree of ICFS (Almeida, Campello, and Weisbach, 2004).
To investigate the effect of MQP on ICFS, we augment the standard investment regression (Kaplan and Zingales, 1997; Cleary, 1999) with ZMQP and its interaction with cash flow.
Given that the cross-sectional variation of MQP is expected to underline the heterogeneity in ICFS across our sample firms, we estimate Model (2) with industry fixed effects based on three-digit standard industrial classifications (SIC) and year-fixed effects.
This evidence suggests that our sample possesses the necessary heterogeneity required to run traditional ICFS tests (Fazzari, Hubbard, and Petersen, 2000).
These results, as well as unreported graphic illustrations of the cross-sectional distribution of MQP and their individual components, are consistent with Bloom and Van Reenen's (2007) findings and provide solid justification to investigate the effect of MQP on ICFS.
We run this test as our premise hinges on the assumption that MQP reduces financing frictions by improving a firm's information quality, which, in turn, leads to lower ICFS.