The Sensitivity of Investment to Cash Flow: An Explanation Based on the Growth-Type-Aligned Financing Hierarchy

53 Pages Posted: 17 Aug 2016

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK)

Date Written: August 17, 2016

Abstract

We find the investment-cash-flow-sensitivity (ICFS) decreases with a firm’s asymmetric informational imperfection about growth (AI), a variable highly persistent over time. Firms with distinctly initial AI have distinct future investment styles and financing patterns. Higher initial AI predicts an investment style with more R&D intensity and a financing pattern with more equity than debt. Types of asymmetric information (about growth vs. assets-in-place) affect external finance so that growth uncertainty appears to facilitate rather than suppress equity financing. These findings are consistent with a growth-type explanation for ICFS and do not support the proposition that informational imperfection generally imposes financial constraints.

Keywords: Investment, Growth type, Informational imperfection, Agency Conflict, Financing Hierarchy, Financial constraint

JEL Classification: G30, G31, G32, D92

Suggested Citation

Wu, Xueping and Au Yeung, Chau Kin, The Sensitivity of Investment to Cash Flow: An Explanation Based on the Growth-Type-Aligned Financing Hierarchy (August 17, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2825036 or http://dx.doi.org/10.2139/ssrn.2825036

Xueping Wu (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Chau Kin Au Yeung

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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