On the negative relation between investment-cash flow sensitivities and cash-cash flow.

Abstract

We predict and find empirical support for a negative relation between the firm’s investment-cash flow sensitivity and cash-cash flow sensitivity, two measures suggested to capture the concept of financing constraints. This negative relation on the firm-level stems from the fact that both investments and the cash account are uses of funds competing for limited available cash flows. Additionally, we find that the investment-cash flow sensitivity is a better predictor for the firm’s constraint-status than the cash-cash flow sensitivity for a longitudinal sample of 1,233 U.S.-based listed firms using an evaluative framework based upon ex-post evaluation of the firmvarying sensitivities.financing constraints; investment-cash flow sensitivities; cash-cash flow sensitivities; firm-varying sensitivities;