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Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series

  • Chen, Huafeng (Jason)
  • Chen, Shaojun (Jenny)

Investment-cash flow sensitivity has declined and disappeared, even during the 2007–2009 credit crunch. If one believes that financial constraints have not disappeared, then investment-cash flow sensitivity cannot be a good measure of financial constraints. The decline and disappearance are robust to considerations of R&D and cash reserves, and across groups of firms. The information content in cash flow regarding investment opportunities has declined, but measurement error in Tobin's q does not completely explain the patterns in investment-cash flow sensitivity. The decline and disappearance cannot be explained by changes in sample composition, corporate governance, or market power—and remain a puzzle.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 103 (2012)
Issue (Month): 2 ()
Pages: 393-410

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Handle: RePEc:eee:jfinec:v:103:y:2012:i:2:p:393-410
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