Gautam, Vikash (2011): Evidence on the dynamics of investment-cash flow sensitivity.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Evidence on the dynamics of investment-cash flow sensitivity|
|Keywords:||investment-cash flow sensitivity; finance constraint; distress; multinomial logistic regression|
|Subjects:||D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
|Depositing User:||vikash gautam|
|Date Deposited:||16. Dec 2011 01:26|
|Last Modified:||20. Feb 2013 18:32|
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