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Investment cash flow sensitivity and financial constraint: a cluster analysis approach

Author

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  • Maurizio La Rocca
  • Raffaele Staglianò
  • Tiziana La Rocca
  • Alfio Cariola

Abstract

This article sheds light on the mixed empirical evidence concerning financial constraint and investment sensitivity to cash flow. The literature suggests that measuring financial constraint is far from straightforward, and we therefore propose a cluster analysis procedure to identify unambiguous groups of constrained firms. We found the investment results to be highly sensitive to cash flow for financial constraint firms. Moreover, in line with previous research, our results showed that the traditional criteria used to identify financially constrained firms led to ambiguous interpretations. Overall, our results propose that the cluster analysis can be used to encompass the various single-criterion approaches, thereby providing a finer measurement of the financial constraint construct and deeper insight into the relationship between investment sensitivity to cash flow and financial constraint.

Suggested Citation

  • Maurizio La Rocca & Raffaele Staglianò & Tiziana La Rocca & Alfio Cariola, 2015. "Investment cash flow sensitivity and financial constraint: a cluster analysis approach," Applied Economics, Taylor & Francis Journals, vol. 47(41), pages 4442-4457, September.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:41:p:4442-4457
    DOI: 10.1080/00036846.2015.1030568
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    3. Gaurav Gupta, 2022. "CEO’s educational background, economic policy uncertainty and investment-cash flow sensitivity: evidence from India," Applied Economics, Taylor & Francis Journals, vol. 54(5), pages 568-579, January.

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