On the Relationship between the Investment-Cashflow Sensitivity and the Degree of Financing Constraints

Paper number: 06/09

Paper date: July 14, 2006

Year: 2006

Paper Category: Working Paper

Authors

Alfonsina Iona, Leone Lionida and Aydin Ozkan

Abstract

We investigate whether the investment-cash flow sensitivity is monotonic in the degree of financing constraints. By using a large panel of publicly traded non-financial U.K. firms, we show that the investment-cash flow sensitivity is neither monotonically increasing nor decreasing in the most common proxies of financing constraints; on the contrary, an inverse U-shaped relationship is observed. Robustness exercises show that the parameter of interest displays, to some extent, a monotonic behavior with respect to size only; however, in contrast with much of the relevant literature, it is found to be greater for larger firms, whose characteristics would hardly lead the researcher to classify them as more financially constrained. If taken as a whole, our findings suggest that higher investment-cash flow sensitivities may hardly be used as evidence of greater

On the Relationship between the Investment-Cashflow Sensitivity and the Degree of Financing Constraints On the Relationship between the Investment-Cashflow Sensitivity and the Degree of Financing Constraints