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Cash Flow Sensitivity of Investment

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  • Armen Hovakimian
  • Gayané Hovakimian
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    Abstract

    "Investment cash flow sensitivity is associated with both underinvestment when cash flows are low and overinvestment when cash flows are high. The accessibility of external capital is positively correlated with cash flows, intensifying investment cash flow sensitivity. Managers actively counteract the variations in internal and external liquidity by accumulating working capital when liquidity is high and draining it when liquidity is low. These results imply that cash flow sensitive firms face financial constraints, which are binding in low cash flow years. Traditional indicators of financial constraints, such as size and dividend payout, successfully distinguish firms that may potentially face constraints, but are less successful in distinguishing between periods of tight and relaxed constraints. These periods are much more clearly separated by the KZ index, which, on the other hand, is less successful in identifying firms that are likely to face liquidity constraints". Copyright (c) 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by European Financial Management Association in its journal European Financial Management.

    Volume (Year): 15 (2009)
    Issue (Month): 1 ()
    Pages: 47-65

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    Handle: RePEc:bla:eufman:v:15:y:2009:i:1:p:47-65

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    Cited by:
    1. Alessandra Guariglia & Xiaoxuan Liu & Lina Song, . "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," Discussion Papers 09/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    2. McTier, Brian C. & Wald, John K., 2011. "The causes and consequences of securities class action litigation," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 649-665, June.
    3. John Knight & Sai Ding and Alessandra Guariglia, 2010. "Investment and financing constraints in China: does working capital management make a difference?," Economics Series Working Papers 521, University of Oxford, Department of Economics.
    4. Couch, Robert & Wu, Wei, 2012. "Private investment and public equity returns," Journal of Economics and Business, Elsevier, vol. 64(2), pages 160-184.
    5. Tsapin Andriy & Tsapin Oleksandr, 2014. "Corporate Investment and Financial Crisis: Can Under- and Overinvestment Be Mitigated by Banks in an Emerging Market?," EERC Working Paper Series 14/04e, EERC Research Network, Russia and CIS.
    6. Chen, Yan-Shing & Chen, I-Ju, 2013. "The impact of labor unions on investment-cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2408-2418.

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