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What Drives Investment-Cash Flow Sensitivity around the World? An Asset Tangibility Perspective

56 Pages Posted: 20 Feb 2013 Last revised: 21 Mar 2017

Fariborz Moshirian

Institute of Global Finance, UNSW Business School

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Alexander Vadilyev

Australian National University (ANU) - College of Business and Economics; Financial Research Network (FIRN)

Bohui Zhang

University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)

Date Written: February 20, 2015

Abstract

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

Moshirian, Fariborz and Nanda, Vikram K. and Vadilyev, Alexander and Zhang, Bohui, What Drives Investment-Cash Flow Sensitivity around the World? An Asset Tangibility Perspective (February 20, 2015). Journal of Banking and Finance 77, 1-17; 8th Annual Conference on Asia-Pacific Financial Markets (the Outstanding Paper Award); Asian Finance Association Conference 2013; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=2221140 or http://dx.doi.org/10.2139/ssrn.2221140

Fariborz Moshirian

Institute of Global Finance, UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855859 (Phone)
+61 2 94877519 (Fax)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Alexander Vadilyev (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Bohui Zhang

University of New South Wales (UNSW) - School of Banking and Finance ( email )

Australian School of Business
Sydney NSW, 2052
Australia
61293855834 (Phone)
61293856347 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/nps/servlet/portalservice?GI_ID=System.LoggedOutInheritableArea&maxWn

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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