Investment-Cash Flow Sensitivities: Constrained Versus Unconstrained Firms

70 Pages Posted: 27 May 2002

See all articles by Nathalie Moyen

Nathalie Moyen

University of Colorado at Boulder - Department of Finance

Date Written: December 2002

Abstract

From the existing literature, it is not clear what effect financial constraints have on the sensitivity of firms' investment to their cash flow. Conflicting results are due to the use of different criteria for identifying financially constrained firms. I propose an explanation that reconciles the conflicting empirical evidence. I present two models: the unconstrained model in which firms can raise funds on external markets and the constrained model in which firms cannot do so. From these two models, I generate a panel of data, including investment and cash flow series. I find that the sensitivity of investment to cash flow is lower for firms described by the constrained model than for firms described by the unconstrained model, consistent with Kaplan and Zingales's (1997) result. I also find in my generated panel of data that the sensitivity of investment to cash flow is higher for low dividend firms than for high dividend firms, consistent with Fazzari, Hubbard, and Petersen's (1988) result.

Suggested Citation

Moyen, Nathalie, Investment-Cash Flow Sensitivities: Constrained Versus Unconstrained Firms (December 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=310599 or http://dx.doi.org/10.2139/ssrn.310599

Nathalie Moyen (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-735-4931 (Phone)
303-492-5962 (Fax)

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