New Insight on Investment-Cash Flow Sensitivity

Sai Ding, Minjoo Kim and Xiao Zhang

Working Papers from Business School - Economics, University of Glasgow

Abstract: The investment-cash flow sensitivity (ICFS) of Chinese listed firms declined during the global financial crisis, which contradicts the conventional financial constraint interpretation of ICFS. We analyze this interesting phenomenon by examining how cash flow uncertainty affects the ways to finance investment in China. We find that ICFS reveals not only the information between investment and cash flow but also the relationship between internal funds and external financing. When internal funds and external financing are complements, cash flow uncertainty decreases ICFS much more than when internal funds and external financing are substitutes. Our results remain robust when we consider the problem of endogeneity and use alternative measures of key variables. Our story is also supported by the sample of US firms, indicating that our new interpretation of ICFS based on cash flow uncertainty and the relationship between internal funds and external financing can apply to the general literature of corporate finance.

Keywords: cash flow uncertainty; financial constraint; debt; cash flow; investment; China (search for similar items in EconPapers)
JEL-codes: E22 G31 O16 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cna, nep-fdg, nep-isf and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2021_16

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