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Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms

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  • NATHALIE MOYEN

Abstract

From the existing literature, it is not clear what effect financing constraints have on the sensitivities of firms' investment to their cash flow. I propose an explanation that reconciles the conflicting empirical evidence. I present two models: the unconstrained model, in which firms can raise external funds, and the constrained model, in which firms cannot do so. Using low dividends to identify financing constraints in my generated panel of data produces results consistent with those of Fazzari, Hubbard, and Petersen; using the constrained model produces results consistent with those of Kaplan and Zingales. Copyright 2004 by The American Finance Association.

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  • Nathalie Moyen, 2004. "Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms," Journal of Finance, American Finance Association, vol. 59(5), pages 2061-2092, October.
  • Handle: RePEc:bla:jfinan:v:59:y:2004:i:5:p:2061-2092
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