Investment Cash Flow Sensitivity and Managerial Optimism: A Literature Review Via the Classification Scheme Technique

Abstract

In this paper, we present a literature review and classification scheme for investment cash flow sensitivity under behavioral corporate finance. The former consists of all published articles between 2000 and 2011 in different journals that are appropriate outlets for BCF research. The articles are classified and results of these are presented and analyzed. The classification of articles was based on nine criteria; journals, date of publication, paper nature, the context of the study adopted behavioral biases, adopted approach, behavioral biases measurement, the adopted assumption, econometric approach and empirical findings. Literature on investment cash flow sensitivity under behavioral corporate finance isn’t well developed. In fact, the behavioral corporate finance is very young. Our review shows that behavioral biases (optimism and overconfidence) have an explanatory power and they can succeed to explain the dependence of corporate investment on the internal cash flow availability. This result is protected in the most cases by the some restrictive assumptions: the absence of agency costs and asymmetric information. Based on the review, suggestions for future research are likewise provided.