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How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?


  • Aydogan Alti

    (University of Texas at Austin.)


I analyze the sensitivity of a firm's investment to its own cash flow in the benchmark case where financing is frictionless. This sensitivity has been proposed as a measure of financing constraints in earlier studies. I find that the investment-cash flow sensitivities that obtain in the frictionless benchmark are very similar, both in magnitude and in patterns they exhibit, to those observed in the data. In particular, the sensitivity is higher for firms with high growth rates and low dividend payout ratios. Tobin's "q" is shown to be a more noisy measure of near-term investment plans for these firms. Copyright 2003 by the American Finance Association.

Suggested Citation

  • Aydogan Alti, 2003. "How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?," Journal of Finance, American Finance Association, vol. 58(2), pages 707-722, April.
  • Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:707-722

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    References listed on IDEAS

    1. Fama, Eugene F & French, Kenneth R, 1995. " Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    3. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
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