Cash Flow Sensitivity of Investment

35 Pages Posted: 22 Mar 2005

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Gayané Hovakimian

Fordham University, Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 23, 2005


Investment cash flow sensitivity is associated with both undervestment when cash flows are low and overinvestment when cash flows are high. The accessibility of external capital is positively correlated with cash flows, intensifying investment cash flow sensitivity. Managers actively counteract the variations in internal and external liquidity by accumulating working capital when liquidity is high and draining it when liquidity is low. These results imply that cash flow sensitive firms face financial constraints, which are binding in low cash flow years. While financial constraints have an economically significant impact on investment timing, cash flow sensitive firms alleviate their effects and, actually, overinvest, on aggregate.

Keywords: Investment cash flow sensitivity, financial constraints, investment, managerial overconfidence

JEL Classification: G30, G31, G32

Suggested Citation

Hovakimian, Armen and Hovakimian, Gayané, Cash Flow Sensitivity of Investment (November 23, 2005). Available at SSRN: or

Armen Hovakimian

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)


Gayané Hovakimian (Contact Author)

Fordham University, Gabelli School of Business ( email )

Joseph A. Martino Hall
45 Columbus Ave
New York, NY 10023
United States
212-636-7021 (Phone)

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