Abstract

http://ssrn.com/abstract=1361277
 
 

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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


University of British Columbia (UBC); Connor, Clark, and Lunn Investment Management

May 5, 2011

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
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

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Date posted: March 17, 2009 ; Last revised: May 12, 2011

Suggested Citation

Chen, Huafeng (Jason) and Chen, Shaojun Jenny, Investment-Cash Flow Sensitivity Cannot Be a Good Measure of Financial Constraints: Evidence from the Time Series (May 5, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1361277

Contact Information

Huafeng (Jason) Chen (Contact Author)
Texas A&M University ( email )
430 Wehner
College Station, TX 77843-4218
United States
Shaojun Jenny Chen
University of British Columbia (UBC) ( email )
2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada
Connor, Clark, and Lunn Investment Management
2200 - 1111 West Georgia Street
Vancouver, V6T 1Z4
Canada
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