Corporate Investment and Cash Flow Sensitivity: What Drives the Relationship?

42 Pages Posted: 1 Jun 2005

See all articles by Paul Mizen

Paul Mizen

University of Nottingham; Bank of England; Centre for Economic Policy Research (CEPR)

Philip Vermeulen

European Central Bank (ECB)

Date Written: May 2005

Abstract

The excess sensitivity of investment to cash flow has been demonstrated in numerous studies. Recent research has identified differences in the degree of sensitivity across countries, which it ascribes to the nature of the lender-borrower relationship in the financial systems of those countries. In this paper we offer new methods and results to determine whether differences are associated with structural explanations such as the nature of the financial system and industrial composition, or due to other firm-specific determinants such as size or creditworthiness. Unlike previous research we are able to systematically control for competing explanations in our data from more than one country and thereby isolate what drives the relationship. We find that creditworthiness is the main driving force of cash flow sensitivity.

Keywords: corporate investment, cash flow sensitivity, cross-country investment studies

JEL Classification: E22, D92

Suggested Citation

Mizen, Paul and Vermeulen, Philip, Corporate Investment and Cash Flow Sensitivity: What Drives the Relationship? (May 2005). ECB Working Papers No. 485. Available at SSRN: https://ssrn.com/abstract=711165

Paul Mizen (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5479 (Phone)
+44 115 951 4159 (Fax)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Philip Vermeulen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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