Debt holdings and investment cash flow sensitivity of listed firms

Johnson Ahiadorme, Agyapomaa Gyeke-Dako and Joshua Yindenaba Abor

International Journal of Emerging Markets, 2018, vol. 13, issue 5, 943-958

Abstract: Purpose - The purpose of this paper is to examine the effect of debt holdings on the sensitivity of firms’ investment to availability of internal funds. Design/methodology/approach - For a panel data set of 27 Ghanaian listed firms for the period 2007–2013, the paper applies the Euler equation approach to the empirical modeling of investment. Findings - The study finds support for the assertion that listed firms face less severe corporate control problems and lower financing constraints, and thus, have lower investment cash flow sensitivities. The study also finds that a significant positive sensitivity of investment to internal funds is associated with firms that have high debt holdings. Practical implications - An implication of this study is that firms with high debt holdings face greater challenges in accessing external finance. These firms are likely to experience under-investment which at a macro level would translate into lower investments and economic growth for the country. Originality/value - Empirical literature document that in the presence of market imperfections, investments of financially constrained firms become sensitive to the availability of internal finance. There are also contradictory evidences regarding the pattern of the observed investment cash flow sensitivity. This study examines the effect of debt holdings on the sensitivity of firms’ investment to availability of cash flow. This is yet to be empirically tested despite some theoretical explanations.

Keywords: Investment; Corporate governance; Cash flow; Managerial discretion; Ownership structure; Cash constraints (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-04-2017-0126

DOI: 10.1108/IJoEM-04-2017-0126

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