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How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?

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  • Aydoḡan Alti

Abstract

I analyze the sensitivity of a firm's investment to its own cash flow in the benchmark case where financing is frictionless. This sensitivity has been proposed as a measure of financing constraints in earlier studies. I find that the investment–cash flow sensitivities that obtain in the frictionless benchmark are very similar, both in magnitude and in patterns they exhibit, to those observed in the data. In particular, the sensitivity is higher for firms with high growth rates and low dividend payout ratios. Tobin's q is shown to be a more noisy measure of near‐term investment plans for these firms.

Suggested Citation

  • Aydoḡan Alti, 2003. "How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?," Journal of Finance, American Finance Association, vol. 58(2), pages 707-722, April.
  • Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:707-722
    DOI: 10.1111/1540-6261.00542
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