Information Production, Cash Flow and Corporate Investment

48 Pages Posted: 8 Dec 2001

See all articles by Qiao Liu

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Rong Qi

ING Aeltus Asset Management

Date Written: August 2002

Abstract

We use a simple information-based model of corporate investment to determine when investment will be sensitive to cash flow. The key cross-sectional prediction of the model is that investment-cash flow sensitivity will be stronger for firms with more informative stock prices, higher cash flow volatility and smaller divergence in opinions among the informed traders. Our model offers a market microstructure-based explanation about the investment-cash flow sensitivity other than the popular "financing constraint" hypothesis proposed by Fazzari, Hubbard, and Petersen (1988). Using financial analysts following a firm as a measure for informed traders, we find strong support for the model predictions. In particular, firms that are intensively covered by analysts have investment that is much more sensitive to cash flow than firms with less analyst coverage. We also verify several other predictions of the model.

Keywords: Information, investment-cash flow sensitivity, financial analyst, Market Microstructure

JEL Classification: G31, G14

Suggested Citation

Liu, Qiao and Qi, Rong, Information Production, Cash Flow and Corporate Investment (August 2002). Available at SSRN: https://ssrn.com/abstract=292844 or http://dx.doi.org/10.2139/ssrn.292844

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Rong Qi

ING Aeltus Asset Management ( email )

10 State House Square
Hartford, CT 06457
United States

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