Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series

Chen, Huafeng (Jason) and Chen, Shaojun (Jenny)
Authors registered in the RePEc Author Service: Huafeng (Jason) Chen

Journal of Financial Economics, 2012, vol. 103, issue 2, 393-410

Abstract: Investment-cash flow sensitivity has declined and disappeared, even during the 2007–2009 credit crunch. If one believes that financial constraints have not disappeared, then investment-cash flow sensitivity cannot be a good measure of financial constraints. The decline and disappearance are robust to considerations of R&D and cash reserves, and across groups of firms. The information content in cash flow regarding investment opportunities has declined, but measurement error in Tobin's q does not completely explain the patterns in investment-cash flow sensitivity. The decline and disappearance cannot be explained by changes in sample composition, corporate governance, or market power—and remain a puzzle.

Keywords: Investment-cash flow sensitivity; Financial constraints; Credit crunch; Measurement error (search for similar items in EconPapers)
JEL-codes: G01 G31 G32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (135)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:2:p:393-410

DOI: 10.1016/j.jfineco.2011.08.009

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