Investment Cash Flow Sensitivity: The Role of Cash Flow Volatility

42 Pages Posted: 5 Nov 2014

See all articles by Klaas Mulier

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics

Bruno Merlevede

Ghent University - Department of General Economics

Date Written: November 4, 2014

Abstract

Low cash flow volatility firms receive stronger signals about future cash flow from a given cash flow shock, yielding a larger drop in demand for external finance and their cost of external finance, implying higher investment-cash flow sensitivities (ICFS). Empirical analysis in 6 European countries confirms this. Considering firms with the same cash flow volatility, ICFS are more pronounced for financially constrained firms (cf. Fazzari et al. (1988)). Considering firms with the same level of financial constraints, ICFS are more pronounced for firms with low cash flow volatility (cf. Kaplan and Zingales (1997)). The contradictory findings in the literature may be explained by cash flow volatility.

Keywords: Investment-cash flow sensitivity, cash flow volatility, cost of finance

JEL Classification: D92; E22; G31

Suggested Citation

Mulier, Klaas and Schoors, Koen J. L. and Merlevede, Bruno, Investment Cash Flow Sensitivity: The Role of Cash Flow Volatility (November 4, 2014). Available at SSRN: https://ssrn.com/abstract=2519012 or http://dx.doi.org/10.2139/ssrn.2519012

Klaas Mulier (Contact Author)

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE) ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 265 35 99 (Fax)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 264 35 99 (Fax)

Bruno Merlevede

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium

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