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Evidence on the determinants of investment-cash flow sensitivity

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  • Vikash Gautam

    (Indira Gandhi Institute of Development Research)

  • Rajendra R. Vaidya

    (Indira Gandhi Institute of Development Research)

Abstract

Investment-cash flow sensitivity (ICFS) is commonly used to investigate finance constraints in firms. However, there are several criticisms of ICFS that need to be confronted. First, higher ICFS may signal preference for internal funds, even when external funds are available on competitive terms. Second, ICFS may not increase monotonically with the finance constraints. Finally, cash flows, apart from capturing information on internal liquidity, also capture information on growth opportunities of firms. Evaluating the ICFS at firm level, the results suggest that ICFS is largely non-monotonic and it cannot be unambiguously associated with finance constraints based on firm characteristics.

Suggested Citation

  • Vikash Gautam & Rajendra R. Vaidya, 2018. "Evidence on the determinants of investment-cash flow sensitivity," Indian Economic Review, Springer, vol. 53(1), pages 229-244, December.
  • Handle: RePEc:spr:inecre:v:53:y:2018:i:1:d:10.1007_s41775-018-0021-3
    DOI: 10.1007/s41775-018-0021-3
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    More about this item

    Keywords

    Investment-cash flow sensitivity; Finance constraints; Internal funds; Monotonicity;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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