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Financial Development and Investment-Cash Flow Sensitivity

Author

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  • Suh, Jungwon

    (Ewha Womans University)

Abstract

Using firm-level data from thirty-five countries around the world, this paper empirically examines whether investment-cash flow sensitivity reflects financial constraints. Recent US studies have raised questions on the prediction that investment-cash flow sensitivity is a measure of financial constraints. Looking at thirty-five countries with varying degrees of financial development, this study tests whether investment-cash flow sensitivity is in fact related to financial constraints. In most countries, the evidence supporting the argument that firms likely facing financially constraints display high investment-cash flow sensitivity is weak. Moreover, the evidence that firms in the absence of developed financial markets display high investment-cash flow sensitivity is also weak. Overall, the results from this international investigation do not support the prediction that investment-cash flow sensitivity reflects financial constraints.

Suggested Citation

  • Suh, Jungwon, 2007. "Financial Development and Investment-Cash Flow Sensitivity," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 11(1), pages 83-117, June.
    • Handle: RePEc:ris:eaerev:0155
    DOI: 10.11644/KIEP.JEAI.2007.11.1.165
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    More about this item

    Keywords

    Investment¡ⓒcash Flow Sensitivity; Financial Constraint; Financial Development;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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