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Is investment - cash flow sensitivity a good measure of financing constraints? New evidence from Indian business group firms

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Author Info
George, Rejie
Kabir, Rezaul
Qian, Jing (Tilburg University, Center for Economic Research)
Abstract

Several studies use the investment - cash flow sensitivity as a measure of financing constraints while some others disagree. The source of this disparity lies mostly in differences in opinion regarding the segregation of severely financially constrained firms from less constrained ones. We examine this controversy by analyzing firms affiliated to business groups that are subject to less financing constraints relative to independent firms. Our results show strong investment - cash flow sensitivities for both group and non-group firms, but no significant difference between them. The finding is robust to alternative investment models and estimation techniques. We investigate this finding further by analyzing the influence of various firm-specific characteristics like size, age, leverage and ownership structure. We continue to observe that less financially constrained firms do not exhibit a significantly lower sensitivity of investment to cash flow. The results of the study thus provide new and compelling evidence demonstrating the inability of investment cash flow sensitivity to be a good measure of a firm's financing constraint.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 49.

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Date of creation: 2005
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Handle: RePEc:dgr:kubcen:200549

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Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing

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  1. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04. [Downloadable!] (restricted)
  2. Marc Deloof, 1998. "Internal Capital Markets, Bank Borrowing, and Financing Constraints: Evidence from Belgian Firms," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 25(7&8), pages 945-968. [Downloadable!] (restricted)
  3. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 197-222, April. [Downloadable!] (restricted)
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  4. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08. [Downloadable!] (restricted)
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