The Impact of Cash Flow Uncertainty on Investment‐Cash Flow Sensitivity in China: The Debt Financing Channel

Sai Ding, Minjoo Kim, Xiao Zhang and Yanyu Zhou

International Journal of Finance & Economics, 2025, vol. 30, issue 4, 3986-4003

Abstract: Chinese firms' investment‐cash flow sensitivity (ICFS) declined during the global financial crisis (GFC), contradicting the conventional financial constraint interpretation of ICFS. We analyse this phenomenon by examining how cash flow uncertainty affects financing investment. We find that ICFS reveals not only the relationship between investment and cash flow but also that between internal funds and debt financing. When internal funds and debt financing are complementary, cash flow uncertainty decreases ICFS more than when they are substitutes. The relationship between internal funds and debt financing weakens when cash flow uncertainty rises. A natural experiment based on the GFC and the post‐GFC economic stimulus package confirms the causal relationship between cash flow uncertainty and ICFS.

Date: 2025
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