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On the Relationship between the Investment-Cashflow Sensitivity and the Degree of Financing Constraints


  • Alfonsina Iona

    (Aston Business School, Aston University)

  • Leone Leonida

    (Department of Economics, Queen Mary, University of London)

  • Aydin Ozkan

    (Department of Economics and Related Studies, University of York)


We investigate whether the investment-cash flow sensitivity is monotonic in the degree of financing constraints. By using a large panel of publicly traded non-financial U.K. firms, we show that the investment-cash flow sensitivity is neither monotonically increasing nor decreasing in the most common proxies of financing constraints; on the contrary, an inverse U-shaped relationship is observed. Robustness exercises show that the parameter of interest displays, to some extent, a monotonic behavior with respect to size only; however, in contrast with much of the relevant literature, it is found to be greater for larger firms, whose characteristics would hardly lead the researcher to classify them as more financially constrained. If taken as a whole, our findings suggest that higher investment-cash flow sensitivities may hardly be used as evidence of greater financial constraints.

Suggested Citation

  • Alfonsina Iona & Leone Leonida & Aydin Ozkan, 2006. "On the Relationship between the Investment-Cashflow Sensitivity and the Degree of Financing Constraints," Discussion Papers 0609, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0609

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    Cited by:

    1. repec:rss:jnljef:v4i2p4 is not listed on IDEAS
    2. Mihaela SIMIONESCU, 2016. "The Investment Determinants For United Kingdom Companies," Romanian Economic Business Review, Romanian-American University, vol. 11(2), pages 223-231, June.

    More about this item


    Investment cash flow sensitivity; Financial constraints; Internal funds; Capital market imperfections.;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies


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