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
Date Written: May 5, 2011
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: Suggested Citation