Evidence on the dynamics of investment-cash flow sensitivity

Vikash Gautam ()

MPRA Paper from University Library of Munich, Germany

Abstract: An important debate in the literature relates to the use of investment-cash flow sensitivity (ICFS) to measure finance constraint faced by firms. This debate is grounded on four prominent issues: a priori sorting of firms, treatment of distressed firms, use of cash flow to represent only internal liquidity of firms and restricting firms to a single regime. In this paper we investigate these issues using a sample of 2676 Indian manufacturing firms over the period 1994 to 2009. We use firm level estimates of ICFS to sort firms into positively cash flow sensitive (PCF-sensitive) group, cash flow insensitive (CF-insensitive) group and, negatively cash flow sensitive (NCF-sensitive) group. We find that all three group of firms start with high levels of investment. But, only the PCF-sensitive firms have high level of cash flows. With age, the investment of all three groups of firms remains stationary. But, for CF-insensitive firms only the cash flow rises with age. Further, we use a multinomial logistic regression to study the determinants of ICFS in the three groups. The results suggest that the interpretation of NCF-sensitive, PCF-sensitive and CF-insensitive as distressed, financially constrained and financially unconstrained, respectively, can be contested by the data.

Keywords: investment-cash flow sensitivity; finance constraint; distress; multinomial logistic regression (search for similar items in EconPapers)
JEL-codes: D21 D82 G31 G32 (search for similar items in EconPapers)
Date: 2011-09, Revised 2011-12
New Economics Papers: this item is included in nep-bec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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