Evidence on the dynamics of investment-cash flow sensitivity
AbstractAn important debate in the literature relates to the use of investment-cash flow sensitivity (ICFS) to measure finance constraint faced by firms. This debate is grounded on four prominent issues: a priori sorting of firms, treatment of distressed firms, use of cash flow to represent only internal liquidity of firms and restricting firms to a single regime. In this paper we investigate these issues using a sample of 2676 Indian manufacturing firms over the period 1994 to 2009. We use firm level estimates of ICFS to sort firms into positively cash flow sensitive (PCF-sensitive) group, cash flow insensitive (CF-insensitive) group and, negatively cash flow sensitive (NCF-sensitive) group. We find that all three group of firms start with high levels of investment. But, only the PCF-sensitive firms have high level of cash flows. With age, the investment of all three groups of firms remains stationary. But, for CF-insensitive firms only the cash flow rises with age. Further, we use a multinomial logistic regression to study the determinants of ICFS in the three groups. The results suggest that the interpretation of NCF-sensitive, PCF-sensitive and CF-insensitive as distressed, financially constrained and financially unconstrained, respectively, can be contested by the data.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 35431.
Date of creation: Sep 2011
Date of revision: Dec 2011
investment-cash flow sensitivity; finance constraint; distress; multinomial logistic regression;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- 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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