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Investment cash flow sensitivity and financial constraint: a cluster analysis approach

Maurizio La Rocca (), Raffaele Staglianò, Tiziana La Rocca and Alfio Cariola
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Raffaele Staglianò: MRM - Montpellier Research in Management - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - UM1 - Université Montpellier 1 - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier
Tiziana La Rocca: University of Messina
Alfio Cariola: Unical - Università della Calabria [Arcavacata di Rende]

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Abstract: This article sheds light on the mixed empirical evidence concerning financial constraint and investment sensitivity to cash flow. The literature suggests that measuring financial constraint is far from straightforward, and we therefore propose a cluster analysis procedure to identify unambiguous groups of constrained firms. We found the investment results to be highly sensitive to cash flow for financial constraint firms. Moreover, in line with previous research, our results showed that the traditional criteria used to identify financially constrained firms led to ambiguous interpretations. Overall, our results propose that the cluster analysis can be used to encompass the various single-criterion approaches, thereby providing a finer measurement of the financial constraint construct and deeper insight into the relationship between investment sensitivity to cash flow and financial constraint.

Keywords: investment cash flow sensitivity; investment; financial constraints; cluster analysis (search for similar items in EconPapers)
Date: 2015
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Published in Applied Economics, Taylor & Francis (Routledge), 2015, 47 (41), pp.4442-4457. ⟨10.1080/00036846.2015.1030568⟩

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DOI: 10.1080/00036846.2015.1030568

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