Download this Paper Open PDF in Browser

The Impact of Cash Holdings and External Financing on Investment-Cash Flow Sensitivity

34 Pages Posted: 19 Jan 2011 Last revised: 22 Jan 2013

Tae-Nyun Kim

The College of New Jersey

Date Written: August 27, 2012

Abstract

In this paper, we propose several factors which can explain the negative relationship between financial constraints and investment-cash flow sensitivity. First, we find that substitutability between reserved cash holdings and internal free cash flow can partially explain why financially constrained firms do not depend on cash flow as heavily as we expect. Second, we confirm that the level of net external financing can also partially explain the investment-cash flow puzzle. Lastly, by examining the relationship between bank dependency and investment-cash flow sensitivity for recession and non-recession periods, we show that investment-cash flow sensitivity can be used as a proxy for a relative measure of financial constraints.

Keywords: investment-cash flow sensitivity, corporate cash holdings, financial constraints

JEL Classification: G30, G32

Suggested Citation

Kim, Tae-Nyun, The Impact of Cash Holdings and External Financing on Investment-Cash Flow Sensitivity (August 27, 2012). Available at SSRN: https://ssrn.com/abstract=1743142 or http://dx.doi.org/10.2139/ssrn.1743142

Tae-Nyun Kim (Contact Author)

The College of New Jersey ( email )

Ewing, NJ 08628-0718
United States

Paper statistics

Downloads
398
Rank
60,433
Abstract Views
1,782