Investment–Cash Flow Sensitivity Measures Investment Thirst, But Not Financial Constraint

33 Pages Posted: 19 Mar 2020

See all articles by Kebin Deng

Kebin Deng

Guangdong University of Foreign Studies

ZHONG DING

Guangdong University of Foreign Studies

Yushu Zhu

University of Queensland - Business School

Qing Zhou

Department of Applied Finance and Actuarial Studies, Macquarie University

Date Written: March 2017

Abstract

Literature streams disagree about the capacity of investment–cash flow sensitivity (ICFS) to measure both investment thirst and financial constraint. We argue that ICFS measures the former but not the latter. Therefore, we use Fazzari et al.'s study (1988) to develop a model to test the relationship between ICFS and financial constraint, but extend that model using Kornai (1979) to include investment thirst. We demonstrate: because the ICFS–financial constraint relationship varies, ICFS cannot measure financial constraint. Conversely, using a natural experiment of China's Four Trillion Stimulus policy, we show ICFS significantly and positively correlates with investment thirst after controlling for financial constraint.

Keywords: Investment–cash flow sensitivity, Financial constraint, Investment thirst, Overinvestment

Suggested Citation

Deng, Kebin and DING, ZHONG and Zhu, Yushu and Zhou, Qing, Investment–Cash Flow Sensitivity Measures Investment Thirst, But Not Financial Constraint (March 2017). Accounting & Finance, Vol. 57, Issue 1, pp. 165-197, 2017, Available at SSRN: https://ssrn.com/abstract=3556035 or http://dx.doi.org/10.1111/acfi.12133

Kebin Deng (Contact Author)

Guangdong University of Foreign Studies

Collaborative Innovation Center for Silk Road
Guangzhou, Guangdong
China

ZHONG DING

Guangdong University of Foreign Studies ( email )

Collaborative Innovation Center for Silk Road
Guangzhou, Guangdong
China

Yushu Zhu

University of Queensland - Business School ( email )

Blair Drive
Brisbane
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/yushu-elizabeth-zhu

Qing Zhou

Department of Applied Finance and Actuarial Studies, Macquarie University ( email )

Sydney, NSW
Australia

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