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The fading of investment-cash flow sensitivity and global development

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  • Larkin, Yelena
  • Ng, Lilian
  • Zhu, Jie

Abstract

This study examines investment-cash flow (ICF) sensitivity across international markets and shows that the sensitivity has been stable in poor countries, but has experienced a sharp decline over time in firms located in rich countries. Our results suggest that the growing wealth of economies worldwide and relaxation of financial constraints at the firm level have led to the disappearance of ICF sensitivity in rich, highly developed countries but not in poor developing ones. We show that access to external finance, especially equity finance, is a key channel through which country-level development affects the sensitivity of investment to internal cash flow. Our evidence suggests that the amount of available economic resources and allocation efficiency are two necessary conditions that ensure the viability of the equity channel.

Suggested Citation

  • Larkin, Yelena & Ng, Lilian & Zhu, Jie, 2018. "The fading of investment-cash flow sensitivity and global development," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 294-322.
    • Handle: RePEc:eee:corfin:v:50:y:2018:i:c:p:294-322
    DOI: 10.1016/j.jcorpfin.2018.04.003
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    Cited by:

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    2. Sprenger, Carsten & Lazareva, Olga, 2022. "Corporate governance and investment-cash flow sensitivity: Evidence from Russian unlisted firms," Journal of Comparative Economics, Elsevier, vol. 50(1), pages 71-100.
    3. Aydin Ozkan & Roberto J. Santillán‐Salgado & Yilmaz Yildiz & María del Rocío Vega Zavala, 2020. "What Happened To The Willingness Of Companies To Invest After The Financial Crisis? Evidence From Latin American Countries," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(2), pages 231-262, May.
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    6. Gaurav Gupta & Jitendra Mahakud, 2022. "Impact of financial distress on investment-cash flow sensitivity: evidence from emerging economy," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 19(4), pages 713-743, July.
    7. Wang, Xun, 2022. "Financial liberalization and the investment-cash flow sensitivity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    8. Sai Ding & Minjoo Kim & Xiao Zhang, 2021. "New Insight on Investment-Cash Flow Sensitivity," Working Papers 2021_16, Business School - Economics, University of Glasgow.
    9. Jianjun Sun & Nannan Zu & Zhifeng Liu, 2022. "The Trends and Gaps in the Sensitivity of Investment to Cash Flow: Evidence from China," Sustainability, MDPI, vol. 14(12), pages 1-26, June.

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    More about this item

    Keywords

    Investment; Cash flow; Financing constraints; Economic growth; Financial development; Equity finance;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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