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On the Relationship between the Investment-Cashflow Sensitivity and the Degree of Financing Constraints

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Author Info

  • Alfonsina Iona

    (Aston Business School, Aston University)

  • Leone Leonida

    (Department of Economics, Queen Mary, University of London)

  • Aydin Ozkan

    (Department of Economics and Related Studies, University of York)

Abstract

We investigate whether the investment-cash flow sensitivity is monotonic in the degree of financing constraints. By using a large panel of publicly traded non-financial U.K. firms, we show that the investment-cash flow sensitivity is neither monotonically increasing nor decreasing in the most common proxies of financing constraints; on the contrary, an inverse U-shaped relationship is observed. Robustness exercises show that the parameter of interest displays, to some extent, a monotonic behavior with respect to size only; however, in contrast with much of the relevant literature, it is found to be greater for larger firms, whose characteristics would hardly lead the researcher to classify them as more financially constrained. If taken as a whole, our findings suggest that higher investment-cash flow sensitivities may hardly be used as evidence of greater financial constraints.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0609.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0609.

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Date of creation: 2006
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Handle: RePEc:exe:wpaper:0609

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Keywords: Investment cash flow sensitivity; Financial constraints; Internal funds; Capital market imperfections.;

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