Investigating Cash Flow Sensitivity of Investments in Firms Quoted on Borsa Istanbul

Costly external financing forces firms to rely more on cash flows generated by their resources and leads to underinvestment. A useful approach to determine the wedge between the cost of internal and external financing is to observe cash flow sensitivity of investments. Firms with a significant investment–cash flow sensitivity are deemed to be financially constrained. Following this approach, this study examines the investment-cash flow sensitivities of non-financial firms that are quoted on Borsa İstanbul for the period of 2002-2014. The results from panel data analysis suggest that smaller and younger firms exhibit investment–cash flow sensitivity while evidence for both industrial categorization and the classification by an index for financial constraints –KZ Index– are inconclusive. Low-dividend firms have the most significant investment–cash flow sensitivity. Without any classification, firms show moderate investment–cash flow sensitivity for the period of 2002–2014. In the crisis period, investments are the most sensitive to cash flows. On the other hand, investment–cash flow sensitivity is not significant for macro-economic growth periods. These findings are in line with the argument that investment–cash flow sensitivity is related to financial constraints.