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

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

Abstract

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.

Suggested Citation

  • Chen, Huafeng (Jason) & Chen, Shaojun (Jenny), 2012. "Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series," Journal of Financial Economics, Elsevier, vol. 103(2), pages 393-410.
  • Handle: RePEc:eee:jfinec:v:103:y:2012:i:2:p:393-410
    DOI: 10.1016/j.jfineco.2011.08.009
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    References listed on IDEAS

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    Keywords

    Investment-cash flow sensitivity; Financial constraints; Credit crunch; Measurement error;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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