The main theme for this collection of papers is to explore the relationship between financial conditions and corporate behavior. In particular, this dissertation considers the effects of financing constraints upon corporate liquidity management policy and investment spending from both theoretical and empirical viewpoints.

Paper One presents a variant of the firm investment-liquidity demand model of Kim, Mauer, and Sherman (1998) and considers the firm's decision problem for choosing the optimal investment level in production and the associated debt-liquidity combinations. My model modifies the original property of debt contract in their model, by introducing the idea of secured lending—collateral constraint on external funds—developed by Bernanke, Gertler, and Gilchrist (1996) and Kiyotaki and Moore (1997). Based on a set of propositions derived from the model analysis, this paper stresses two implications: (1) the investment level in production critically depends on firm's expectation about its future financial conditions—future cash flows, expected growth opportunities, and the degree of debt obligations, and (2) financially constrained firm's preference toward internal funds monotonically increases in the degree of agency cost of external financing arising from capital market imperfections.

Paper Two empirically examines the properties of corporate liquidity holding behavior. The purpose of this paper is to test the implications derived in Paper One, concerning the impact of innovation to internal funds (measured by current cash flow) upon the corporate liquidity management policies under different financing conditions. By using a panel data set of all listed firms in Japan over the 1981–2006 period, this paper gauges the cash flow sensitivity of liquidity for each group of financially unconstrained and constrained firms, checks the behavioral difference between these groups, and examines the presence of monotonicity property in the liquidity-cash flow sensitivity in the group of financially constrained firms.

Finally, Paper Three completes the empirical analysis of testing the theoretical implications consistent with those derived in Paper One: (1) Due to the presence of a wide spectrum of alternative financing sources, the effect of a change in cash flow upon investment spending is indeterminate for financially unconstrained firms; (2) In contrast, the effect of a change in cash flow upon investment spending is significantly positive for financially constrained firms, which would reflect the presence of extra cost of external financing associated with capital market imperfections. By using the same data set examined in Paper Two, the final paper identifies the firm heterogeneity by evaluating cash flow sensitivities of investment over groups of firms under different financial conditions. The findings in this paper are broadly consistent with those in Financing Hierarchy Hypothesis of Fazzari, Hubbard, and Petersen (1988) and in Financial Accelerator Principle of Bernanke, Gertler, and Gilchrist (1996).