Investment, default propensity score and cash flow sensitivity in six EU member states: evidence based on firm-level panel data

Andreas Behr, Christoph Schiwy and Jurij Weinblat

Applied Economics, 2019, vol. 51, issue 49, 5345-5368

Abstract: Using a panel data set covering six European countries and $$119700$$119700 firms ($$582153$$582153 observations) over the period $$2008$$2008–$$2013$$2013, we analyse the cash flow sensitivity of investment spending. As most of the firms are not listed at stock exchanges, a balance sheet-based approximation on Tobin’s Q is used to indicate investment opportunities. We analyse internal and external liquidity constraints and their effect on investment decisions. In the literature, external constraints are most often indicated by simple accounting-based items/ratios. As the adequacy of the a priori indicator, reflecting the external constraints, is crucial, we contribute in proposing a more sophisticated approach. We estimate propensities to default using adapted random forests. In our descriptive analysis, we find strong evidence for the u-shape of the investment curve. However, after controlling for investment opportunities we find no increased cash flow sensitivity of investment, neither for a priori externally nor for internally constrained firms. Hence, our results hint for the absence of liquidity constraints. We attribute these towards the rather expansionary monetary policy since the financial crisis.

Date: 2019
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DOI: 10.1080/00036846.2019.1613499

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