How Sensitive is Investment to Cash Flow When Financing is Frictionless?

Posted: 25 Sep 2003

See all articles by Aydogan Alti

Aydogan Alti

University of Texas at Austin - Department of Finance

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Abstract

I analyze the sensitivity of a firm's investment to its own cash flow in the benchmark case where financing is frictionless. This sensitivity has been proposed as a measure of financing constraints in earlier studies. I find that the investment-cash flow sensitivities that obtain in the frictionless benchmark are very similar, both in magnitude and in patterns they exhibit, to those observed in the data. In particular, the sensitivity is higher for firms with high growth rates and low dividend payout ratios. Tobin's q is shown to be a more noisy measure of near-term investment plans for these firms.

Suggested Citation

Alti, Aydogan, How Sensitive is Investment to Cash Flow When Financing is Frictionless?. Available at SSRN: https://ssrn.com/abstract=416661

Aydogan Alti (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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