 Is the investment-cash flow sensitivity divergent when information is asymmetrically distributed?The Journal of Economic Asymmetries, 2019, vol. 19, issue C, - Abstract: This paper deals with the asymptotic behavior of the investment-cash flow sensitivity when financing constraints are binding under asymmetrical distribution of information. A booming empirical literature showed that the investment-cash flow sensitivity can be used as a metric to measure financing constraints. Although various critiques have been addressed to this metric, it still is used in theoretical and empirical studies. I consider the bank's deterministic participation constraint, measure financing constraints parsimoniously, and infer a dynamic, linear relationship of the investment-cash flow sensitivity. The major theoretical implications of this paper show a divergence characteristic of the investment-cash flow sensitivity. Indeed, the worsening of the financial contracting terms tends to induce an infinite increase of the sensitivity. In addition, there exists a threshold level beyond which the firm is expected to be more financially constrained in the future and its investment-cash flow sensitivity is deemed to diverge more rapidly. Keywords: Investment-cash flow sensitivity; Capital-market imperfections; Information asymmetry; Monotonicity hypothesis (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:19:y:2019:i:c:1 DOI: 10.1016/j.jeca.2018.e00111 Access Statistics for this article The Journal of Economic Asymmetries is currently edited by A.G. Malliaris More articles in The Journal of Economic Asymmetries from Elsevier |
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