Uncertainty and Investment–Cash Flow Insensitivity: Evidence on Cautionary Channel

51 Pages Posted: 16 Jan 2020 Last revised: 3 Sep 2021

See all articles by Masayo Kani

Masayo Kani

Tezukayama University

Kiyotaka Nakashima

Independent Economist

Date Written: September 2, 2021


This paper examines two hypotheses regarding how uncertainty affects investment–cash flow sensitivity. In this regard, one hypothesis pertains to the cautionary channel through which investment–cash flow sensitivity decreases as uncertainty increases, and the other relates to the financing constraint channel through which the sensitivity increases. This paper evaluates the impact of uncertainty on investment–cash flow sensitivity by using firm-level data on the Japanese manufacturing industry. We demonstrate that the cautionary effect that makes actual corporate investment decisions unresponsive to the firm’s financing conditions becomes dominant under higher uncertainty irrespective of the type of corporate investment—capital investment and research and development (R&D)—and is more pronounced in firms with fewer cash holdings.

Keywords: uncertainty shock; capital investment; R&D; investment–cash flow sensitivity; system GMM; cautionary behavior

JEL Classification: G01, G31, G32

Suggested Citation

Kani, Masayo and Nakashima, Kiyotaka, Uncertainty and Investment–Cash Flow Insensitivity: Evidence on Cautionary Channel (September 2, 2021). Available at SSRN: https://ssrn.com/abstract=3510011 or http://dx.doi.org/10.2139/ssrn.3510011

Masayo Kani (Contact Author)

Tezukayama University ( email )

7-1-1 Tezukayama
Nara, 631-8051

Kiyotaka Nakashima

Independent Economist ( email )

HOME PAGE: http://kiyotaka.sakura.ne.jp/

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