Investment-Cash Flow Sensitivity Cannot Be a Good Measure of Financial Constraints: Evidence from the Time Series

49 Pages Posted: 17 Mar 2009 Last revised: 12 May 2011

Huafeng (Jason) Chen

Tsinghua University - PBC School of Finance

Shaojun Jenny Chen

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

Date Written: May 5, 2011

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.

Keywords: investment-cash flow sensitivity, financial constraints, credit crunch, measurement error

JEL Classification: G01, G31, G32

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: https://ssrn.com/abstract=1361277

Huafeng (Jason) Chen (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Shaojun Jenny Chen

Connor, Clark, and Lunn Investment Management

2200 - 1111 West Georgia Street
Vancouver, V6T 1Z4
Canada

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

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