Investment-Cash Flow Sensitivity Cannot Be a Good Measure of Financial Constraints: Evidence from the Time Series
Huafeng (Jason) Chen
Texas A&M University
Shaojun Jenny Chen
Connor, Clark, and Lunn Investment Management; University of British Columbia (UBC)
May 5, 2011
Journal of Financial Economics (JFE), Forthcoming
Investment-cash flow sensitivity has declined and disappeared, even during the 2007-2009 credit crunch. If one believes that financial constraints have not disappeared, then investment-cash flow sensitivity cannot be a good measure of financial constraints. The decline and disappearance are robust to considerations of R&D and cash reserves, and across groups of firms. The information content in cash flow regarding investment opportunities has declined, but measurement error in Tobin’s q does not completely explain the patterns in investment-cash flow sensitivity. The decline and disappearance cannot be explained by changes in sample composition, corporate governance, or market power; and remain a puzzle.
Number of Pages in PDF File: 49
Keywords: investment-cash flow sensitivity, financial constraints, credit crunch, measurement error
JEL Classification: G01, G31, G32
Date posted: March 17, 2009 ; Last revised: May 12, 2011
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