The Impact of Growth Opportunities on the Investment-Cash Flow Sensitivity

34 Pages Posted: 6 Mar 2008

See all articles by Frederiek Schoubben

Frederiek Schoubben

KU Leuven; KU Leuven

Cynthia Van Hulle

KU Leuven - Department of Applied Economics

Date Written: December 2007

Abstract

This paper investigates the relevance of growth opportunities for the interpretation of investment-cash flow sensitivity of large Belgian companies. We use data on both listed and large unlisted firms to better distinguish between issues of overinvestment due to agency problems and underinvestment due to capital constraints. Simultaneously this data set offers opportunities to incorporate a wide variation in levels of asymmetric information. We show that, contrary to what is generally accepted, decreasing cash flow sensitivity as growth prospects improve need not indicate overinvestment. Rather it may indicate that capital constrained firms increase the use of external financing in high growth periods as these financing sources then tend to become more appealing. As a result the dependence of investment decisions on internal financing is diminished, thereby reducing measured cash flow sensitivity below the level of low growth years.

Keywords: Investment decisions, Financing decisions, Financial constraints, Asymmetric information, Stock Listing

JEL Classification: G3, G31, G32

Suggested Citation

Schoubben, Frederiek and Van Hulle, Cynthia, The Impact of Growth Opportunities on the Investment-Cash Flow Sensitivity (December 2007). Available at SSRN: https://ssrn.com/abstract=1101685 or http://dx.doi.org/10.2139/ssrn.1101685

Frederiek Schoubben (Contact Author)

KU Leuven ( email )

Naamsestraat 69
B-3000 Leuven, 3000
Belgium

KU Leuven ( email )

FEB
Korte Nieuwstraat 33
Antwerp, 2000
Belgium

Cynthia Van Hulle

KU Leuven - Department of Applied Economics ( email )

Naamsestraat 69
B-3000 Leuven
BELGIUM
32-16-326734 (Phone)
32-16-326732 (Fax)

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