The Sensitivity between Debt Financing and Internal Cash Flow with Financing Constraints: Evidence from Chinese Stock Market

With the existence of information asymmetry, the actual capital market is not perfect and the external financing cost is higher than that of internal funds obviously. Thus firms face the financing constraints when external financing. Using internal cash flow to reflect the internal financing capability, we create a model to analyze the sensitivity between the debt financing and internal cash flow when firms facing different degrees of financing constraints. On the basis of the analysis, two main conclusions can be drawn from the empirical research: 1. the debt financing is remarkably negative related to the internal cash flow; the more internal cash flow, the less the debt financing will be. 2. The financing constraints can affect the sensitivity between the debt financing and internal cash flow. There is a high sensitivity between debt financing and internal cash flow when firms face strong financing constraints, and the sensitivity decreases as financing constraints become week