Table 1 Studies analyzing the role of cash flow sensitivity to investment around the globe
From: Financial constraints and investment decisions of listed Indian manufacturing firms
Author | Segmenting variables | Methodology | Findings |
|---|---|---|---|
Fazzari et al. (1988) | Dividend pay-out | Ordinary least square regression | Cash flow sensitivity is significant for low pay-out firms and insignificant for high pay-out firms. |
Devereux & Schiantarelli (1990) | Age, size, age + size | Ordinary least square regression | Large firms are more sensitive to cash flow when size is splitting criteria and when firms are segmented on the basis of age cash flow is more important for newer firms than older ones. |
Hoshi, Kashyap & Scharfstein (1991) | Business group affiliation | Ordinary least square regression | Investment is more sensitive to the group of firms for which the lender has less information available. It also highlights role of intermediaries in the investment process. |
T. Whited (1992) | Interest coverage ratio | Linear Regression with GMM estimator | Financial constraints significantly affects the firm that do not participate in the bond market. Financial variables affects constrained firms much more than unconstrained firms. |
Hubbard, Kashyap, and Whited (1995) | Dividend pay-out | Linear Regression with GMM | Capital market imperfections effects investment decisions |
Bond & Meghir (1994) | Dividend over capital stock+ Share issues | Generalized method of moments and hierarchy of finance model | Current investment is positively related to lagged cash flows even after controlling for output fluctuations (Imperfect competition) and debt (bankruptcy cost –taxes). |
Chiriko & Schaller (1995) | Age, concentration of ownership, Business group affiliation | Ordinary least square regression | Firms in weak information positions due to ownership structure, group membership and age have larger coefficients to liquidity even after correcting for endogeneity |
Gilchrist & Himmelberg (1995) | Dividend pay-out ratio, size and existence of bond rating | Generalized method of moments and simple regression | Similar behaviour of large and small firms under the assumption of financial constraints. |
Kaplan & Zingales (1995) | Dividend pay-out | Ordinary least square regression | Cash flow sensitivity is larger for unconstrained firms rather than constrained firms which contradicts results of Fazzari et al. (1988) |
Kadapakkam, Kumar, & Riddick (1998) | Size | Ordinary least square regression | The cash flow sensitivity is highest in the large firm size group and smallest in the small firm size group. It is also reported that cash flow sensitivity is independent of the measure of firm size. |
Cleary (1999) | Financial status index | Ordinary least square regression and multiple discriminant analysis | Least constrained firms are more sensitive to cash flow sensitivity to investment. |
Lensink, der Molen, & Gangopadhyay (2003) | Business group affiliation | Regression with OLS and GMM estimation | The study reports that there is a significantly positive group affiliation effect: stand-alone companies have higher cash flow sensitivities than group affiliates. It also finds that there is a significant impact of firm size on the cash flow sensitivity of firm investment. A larger firm typically has a higher cash flow coefficient. Another result is the effect of a firm’s age: we find some evidence that younger firms have lower cash flow coefficients. |
Wang (2003) | Stochastic frontier modelling | Stochastic frontier modelling | Cash flows will not only promote the rate of investment in an environment of financing constraints, but they also has a strong effect on reducing the variance of financing constraints |
Almeida, Campello, & Weisbach (2004) | dividend pay-out, size, bond ratings, commercial paper ratings, Kaplan-Zingales index | Ordinary least square regression | Financially constrained firms have higher propensity to retain cash following negative macroeconomic shocks, while unconstrained firms do not show any such relation. |
Cleary (2006) | Size, dividend pay-out ratio and Financial status index | Ordinary least square regression and multiple discriminant analysis | The results suggests that the investment decisions of firms with stronger financial positions are much more sensitive to the availability of internal funds than those that are less creditworthy confirming with the results of Kaplan & Zingales, (1995) and Cleary, (1999). |
T. M. Whited & Wu (2006) | Synthetic index | Regression with GMM estimator | The study reports evidences that firm-level external finance constraints do indeed represent a source of undiversifiable risk that is priced in financial markets. |
Almeida & Campello (2007) | Asset tangibility, dividend pay-out, size, bond ratings, commercial paper ratings | Switching regression and generalized method of moments | The study reports that while asset tangibility increases investment–cash flow sensitivities for financially constrained firms, no such effects are observed for unconstrained firms. It also highlights tangibility of assets influences a firm’s credit status according to theoretical expectations: firms with more tangible assets are less likely to be financially constrained. |
Denis & Sibilkov (2010) | Dividend pay-out, firm size, Bond rating, commercial paper rating | Ordinary least square regression | The results indicate that higher cash holdings are associated with higher levels of investment for constrained firms with high hedging needs and that there is a significantly stronger positive association between investment and value for constrained than for unconstrained firm. |
Campello, Graham, & Harvey (2010) | Survey data | Ordinary least square regression | The study finds that that financially constrained firms plan to cut more investment, technology, marketing, and employment relative to financially unconstrained firms during the crisis. It also shows that constrained firms are forced to burn a sizeable portion of their cash savings during the crisis and to cut more deeply planned dividend distributions. In contrast, unconstrained firms do not display this behaviour. |
Bhaumik et al. (2012) | Stochastic frontier modelling | Stochastic frontier modelling | Financial constraints in India are alleviated by cash flows and (log) assets of firms, and aggravated by a high leverage level. We also find that business groups alleviate credit constraints for member firms, but their ability to do so has declined over time. |
Bavarsad et al. (2013) | Kaplan-Zingales Index | Linear regression | Small firms faces more financial constraints than larger firms. |
Črnigoj, M., & Verbič, M. (2014) | EBITDA, Interest coverage ratio, Size log (sales) and the level of financial slack | Generalized method of moments and switching regression | During the time of financial crisis in Slovenian firms in 2009 both financially constrained and unconstrained firms were effected but the smaller firms were more affected than middle and large size firms. Financially constrained firms are more cash flow sensitive to investment. |
Stucki (2014) | Survey data | Probit model | Firm survival and the achievement of profit break-even are negatively correlated with financial constraints. With increasing firm age, the impact of financial constraints on the survival probability disappears. The negative effect on the probability to achieve profit break-even, however, remains statistically significant. |
Ameer (2014) | Q ratio and debt ratio | Panel smooth transition and switching regression | The study suggests that investment is not only sensitive to cash flows but also to business cycle and tangibility of assets for the Asian firms. |