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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, R.
  • Kabir, M.R.
  • Qian, J.

    (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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-49.

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

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Web page: http://center.uvt.nl

Related research

Keywords: investment; cash flow; business group; financing constraints;

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  1. Marc Deloof, 1998. "Internal Capital Markets, Bank Borrowing, and Financing Constraints: Evidence from Belgian Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(7&8), pages 945-968.
  2. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  3. Stephen Bond & Costas Meghir, 1990. "Dynamic Investment Models and the Firm's Financial Policy," CEPR Financial Markets Paper 0013, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  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.
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Cited by:
  1. Lee, Kang-Kook & Islam, Md. Rabiul, 2011. "Financial Development and Financing Constraints in a Developing Country: The Case of Bangladesh," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 46(1), pages 41-67.

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