The Determinants of Investment-Cash Flow Sensitivity
41 Pages Posted: 24 Jul 2006
Date Written: 2006
Using firm-level estimates of investment-cash flow sensitivity, I classify firms into groups of high, low, and negative sensitivity. I find that investment-cash flow sensitivity is non-monotonic with respect to financial constraints, cash flows, and growth opportunities. Specifically, firms with negative cash flow sensitivity have the lowest cash flows and highest growth opportunities, and appear the most financially constrained. Cash flow insensitive firms have the highest cash flows and lowest growth opportunities, and appear the least financially constrained. At least partially, negative cash flow sensitivity is driven by high investment and low cash flow levels at the inception of firms as public companies, which decrease and increase, respectively, with age.
Keywords: Cash flow sensitivity, Investment, Financing constraints
JEL Classification: G31, G32
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