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Sample separation and the sensitivity of investment to cash flow: Is the monotonicity condition empirically satisfied?

Author

Listed:
  • Alfonsina Iona

    (Queen Mary University of London)

  • Leone Leonida

    (King’s Business School, King’s College London)

Abstract

This paper studies whether the monotonicity condition of the investment-cash flow sensitivity is satisfied empirically. We show that if this condition holds, then the point of sample separation does not affect the monotonic relationship between the sensitivities of any two complementary classes of observations. Our test, based upon observable averages of the investment-cash flow sensitivity, rejects the monotonicity condition for any common metric of financing constraints we use. The testing procedure we propose reconciles the conflicting findings of the literature about the shape of the investment-cash flow sensitivity.

Suggested Citation

  • Alfonsina Iona & Leone Leonida, 2018. "Sample separation and the sensitivity of investment to cash flow: Is the monotonicity condition empirically satisfied?," Working Papers 862, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:862
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2018/wp862.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment-cash flow sensitivity; Monotonicity condition; Sample separation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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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