Investment, financing, and liquidity constraints in not -for -profit hospitals.

Abstract

Fixed capital investment and financing are posing challenges for not-for-profit hospitals faced with tightening credit markets. Corporate finance theory dictates that under perfect capital markets, investment and financing decisions should be separate. However, previous research has shown that capital market imperfections can create a dependence of investment on financing. This dissertation comprises three studies that expand on previous work by exploring the general nature of investment-financing interactions in not-for-profit hospitals. The studies utilize 1997--1999 audited financial statement data from the Merritt Research Services, LLC Investor Tools database, supplemented by operating and market data from the American Hospital Association's Guide to the Healthcare Field and the 1997 Bureau of Health Professions' Area Resource File. The first study uses univariate analysis and logistic regression to identify financial, operating and market characteristics that significantly contribute to a not-for-profit hospital's likelihood of being classified a high spender on fixed capital projects. The findings show that an increase in the debt-to-assets ratio and the availability of operating cash flows, as well as measures of investment demand, are the most important factors influencing a hospital's likelihood of being a high investor. In the second study, two-stage least squares regression on mean-differenced panel data is used to test for relationships between fixed capital expenditures and sources of financing. Results suggest that investment is dependent on internal sources of financing; however, increases or decreases in debt financing do not significantly affect capital expenditures. The third study explores, further, the relationship between investment and internal sources of financing for hospitals classified as liquidity-constrained or not liquidity-constrained on the basis of the number of days cash on hand. Using two-stage least squares regression on mean-differenced data, the effects of financing variables on capital expenditures are estimated for each group of hospitals. Findings reveal that investment by liquidity-constrained hospitals is dependent on internal sources of financing, while investment by hospitals classified as not liquidity-constrained appears independent of financing. Together, the three studies provide evidence that the investment decisions of not-for-profit hospitals, particularly those with little net worth to support borrowing, are dependent on internally generated sources of funds.