What Drives Investment-Cash Flow Sensitivity around the World? An Asset Tangibility Perspective
8th Annual Conference on Asia-Pacific Financial Markets (the Outstanding Paper Award)
56 Pages Posted: 20 Feb 2013 Last revised: 21 Mar 2017
Date Written: February 20, 2015
Motivated by ongoing debates on investment-cash flow sensitivity (ICFS) and its documented decline and disappearance in the U.S., we investigate the determinants of ICFS. Using firm-level data across 41 countries for the 1993–2013 period, we document an important role of asset tangibility in explaining the patterns in ICFS. Asset tangibility affects ICFS through two channels: investment intensity and cash flow persistence. As the share of tangible capital, investment and cash flow persistence has fallen in developed economies, ICFS has declined. In contrast, as developing economies operate with more tangible capital, have higher investment rates and more persistent cash flows, their ICFS is more stable. The results support our explanation of ICFS as a reflection of capital (investment) intensity and income predictability, rather than a measure of financial constraints.
Keywords: investment-cash flow sensitivity; investment-cash flow-tangible capital sensitivity; asset tangibility; investment intensity; cash flow persistence
JEL Classification: G01, G31, G32
Suggested Citation: Suggested Citation