Investment-cash Flow Sensitivity Research Articles

The investment-cash flow sensitivity and the financing constraints hypothesis for emerging markets: a bibliometric and systematic literature review

PurposeThe literature on financing constraints in emerging markets is still under-researched and is often described as a “black box.” This study aims to shed light on this underexplored area for emerging economies. Specifically, it attempts to understand the phenomenon of financing constraints through a systematic review and bibliometric analysis.Design/methodology/approachA systematic literature review and bibliometric analysis are used to identify the main features of investment-cash flow sensitivity and the financing constraints hypothesis in the context of emerging markets.FindingsFinancing constraints and investment-cash flow sensitivity in emerging markets should be analyzed in light of capital market imperfections, financial liberalization and macroeconomic conditions.Research limitations/implicationsThis study is expected to serve as a valuable resource for researchers interested in the financing challenges faced by firms in emerging economies.Originality/valueTo the best of the author’s knowledge, this is the first comprehensive systematic and bibliometric literature review that examines the distinct characteristics of the financing constraints hypothesis on investment decisions in emerging markets.

Cash or crash? The diversification game and corporate cash holdings in India

Purpose This paper aims to explore how corporate diversification influences corporate cash holdings (CCH) in India. It also assesses CCH behavior and its determinants during crisis, stability and recovery periods. Design/methodology/approach The study uses the system generalized method of moments (System GMM) on 1684 non-financial firms listed on the National Stock Exchange during 2002–2022. Further analyses are carried out for group-affiliated firms based on investment cash flow sensitivity, agency costs and debt capacity. Findings The findings show that firm diversification (at the group level) results in a roughly 6% fall in cash ratio, thereby implying that diversified firms (diversified business groups) hold lower cash levels than specialized firms. The reduced cash balances are attributed to the financially unconstrained nature of diversified business groups, higher debt capacity, good governance behavior and active internal markets. Additionally, the authors observe a time-varying cash policy for diversified firms, with mean cash holdings being 2% higher during crisis periods. Moreover, the findings reveal that the inverse relationship between diversified firms and CCH is less pronounced for unrelated diversified firms (2% fall in cash ratio) than related diversified firms (5% fall in cash ratio). Originality/value To the best of the authors’ knowledge, this is the first study to examine the relationship between corporate diversification and CCH in India during both crisis and non-crisis periods. The authors’ research uniquely uses System GMM on a large sample and differentiates between related and unrelated diversification.

Financial decision dynamics: Environmental, social, and governance factors and managerial choices in emerging markets

This study examines the linkage between the ESG performance of firms and managerial decision-making. It uses 8 years of ESG performance data of 110 Indian firms collected from the Thomson Reuters database. The study finds that high ESG performance mitigates a firm’s cost of debt more than equity cost. Furthermore, increases in ESG performance are associated with higher capital expenditures, lower investment cash flow sensitivity, higher cash holdings, and lesser payout of increased cash flows to shareholders. The findings are in sync with the Slack resources view, suggesting that the requirement of financial Slack for ESG-related innovations and risk-bearing is large and impacts the major managerial decisions of firms. While the effects of environmental and social performance on these decisions are similar to that of the composite ESG performance, governance performance shows an independent impact on the payout decisions of firms. The Granger Causality test reveals a bi-directional association between debt issues and ESG performance. The main results obtained from the multiple panel regressions are robust to additional tests involving lead-lag analysis. The overall findings of this study highlight the importance of ESG performance screening in the managerial decision-making process of investors who would not like to risk growth potential for a short-term increase in dividends.

Information flow and investment cash flow sensitivity

ABSTRACT In this paper, we examine whether firms with greater information flow, i.e. which reveal more firm-specific information through their idiosyncratic stock price movements, are associated with lower investment cash flow sensitivity. Using a sample of 450 French non-financial firms over the period 2006–2022, we find results consistent with the idea that greater information flow decreases information asymmetry, thus allowing firms to carry out investments more efficiently as they depend less on the availability of internal cash flows.

Social insurance law and corporate performance in China

Social Insurance Contributions exert a liquidity constraint on firms and hence influence the performance of firms. By exploiting the enforcement of China's Social Insurance Law (SIL) in 2011 as a quasi-natural experiment, this paper studies the impact of social insurance contributions on the performance of enterprises through a difference-in-differences method. We find that SIL negatively affects the performance of firms, and this effect is more pronounced in firms with weaker cost-shifting capacity. Mechanism tests prove the liquidity constraints channel through the perspective of the firm's cash flow, accounts payable, investment-cash flow sensitivity, and scale of operations. Our findings demonstrate that firms cannot fully mitigate the negative impact brought by Social Insurance Contributions.

Does Financial Derivative Hedging Reduce Firms’ Financial Constraints?

This study examines the relationship between the firms’ derivative risk management and its financial constraints. Firms face a wedge between their internal and external financing for their investments. I test whether this wedge reduces firms’ financial constraints when they hedge using interest rate, foreign currency, and commodity derivatives. Using an event study and a difference-in-differences framework around implementing Financial Accounting Standard (FAS) 123R, this study shows a strong causal relationship between derivative hedging and financial constraints. I find that net debt increases for the derivative hedging firms, on the other hand, cash holdings and net equity issuance decreases. When managers of non-financial corporations believe that their firm will face a liquidity shortage, they save more cash out of cash flow as a precautionary measure. Both cash flow-cash sensitivity and investment-cash flow sensitivity decrease. The analysis also shows that both the loan spread and the probability of covenant violation decrease after firms start derivative hedging. The main implication of the analysis is that risk management influences the asymmetric information between lenders and borrowers: the increase in risk management, the less the asymmetry.

Geopolitical risk and investment-cash flow sensitivity: does the age of the CEO matter? Empirical evidence from emerging economy

ABSTRACT This study examines the impact of geopolitical risk on investment–cash flow sensitivity. Further, this study also investigates the moderating role of the chief executive officer’s age on the relationship between geopolitical risk and investment–cash flow sensitivity for Indian firms. Using the system-generalized method of moments technique, this study uses two-way interaction and reveals that geopolitical risk increases investment–cash flow sensitivity. Further, this study also uses three-way interaction and discloses that the chief executive officer’s age moderates the effect of geopolitical risk on investment–cash flow sensitivity. Interestingly, this study finds that older and middle-aged (younger) chief executive officers diminish (increase) the impact of geopolitical risk on investment–cash flow sensitivity. This study also shows that the effect of geopolitical risk remains consistent while incorporating alternate measurements of the dependent and independent variables.

Self‐serving attribution and managerial investment decision

AbstractThis study examines whether managerial overconfidence coupled with self‐attribution bias distorts the investment decisions of firms. To this end, we investigate the impact of overconfidence on asymmetric investment cash flow sensitivity (ICS). We find that managerial overconfidence affects ICS in a downward‐sticky direction, which is reinforced by overconfidence coupled with managerial self‐attribution. The results for both unconstrained and constrained firms are qualitatively consistent with those for the overall sample; however, the constrained subsample provides slightly weaker results. Thus, our findings indicate that managerial overconfidence and self‐attribution to recent successes may induce managers to make excessive investment commitments.

ESG Performance on Investment-Cash Flow Sensitivity: Case Study of Non-Financial Companies Listed on the Indonesian Stock Exchange

This research aims to analyze the influence of ESG performance on Investment - Cash Flow Sensitivity of non-financial companies listed on the Indonesia Stock Exchange for the 2017-2022 period. ESG performance was measured using ESG ratings from Sustainalytics' ESG Research and Ratings, obtained from the Bloomberg Terminal database. Testing process was carried out on 50 registered non-financial companies in Indonesia for six years with a total of 300 observations obtained through purposive sampling techniques. The results of research employed panel balance data and the OLS method found that there are still phenomena Investment – Cash Flow Sensitivity occurred and good ESG performance could reduce Investment – Cash Flow Sensitivity. Thus, it can be indicated that companies implementing good ESG performance can more easily obtain funding sources.

The Impact of Economic Policy Uncertainty on Investment - Cash Flow Sensitivity: Does ESG Make Any Difference?

This paper investigates the impact of Economic Policy Uncertainty (EPU) on Investment-Cash Flow Sensitivity (ICFS). Further, this study examines whether ESG moderates the impact of such uncertainty on the ICFS of the manufacturing firms in India. The study has applied system-GMM regression with a sample of 222 firms from 2012 to 2022. It reveals that EPU dampens corporate investment and magnifies the role of cash flow in corporate investment. Further, firms' Environmental, Social and Governance (ESG) performance decelerates the adverse impact of EPU on ICFS and makes the investment-cash flow less sensitive. Furthermore, the study highlights that ESG helps to access external funds easily. Overall, this paper contributes new insights to the present literature, and the outcomes of this study are of greater interest to economists, firms, managers, and investors.

Fading Investment-Cash Flow Sensitivity Puzzle and Assets Tangibility – Evidence From the UK

Fading Investment-Cash Flow Sensitivity Puzzle and Assets Tangibility – Evidence From the UK

Testing Financial Constraint Hypothesis of Investment in NEPSE Listed Companies

This study aims to test financing constraints of Nepalese firms and its impact on investment behavior by controlling the accelerator effect. It divides the firms into Financially Constrained (FC) and Unconstrained (UC) group using discriminant analysis and uses Econometric Model to analyze investment cashflow sensitivities (ICFS) of firms. The data comprised the accounting observations (n=256) obtained from the annual reports of 16 non-financial companies listed in Nepal Stock Exchange Ltd. Results show that financially constrained firm exhibit higher cashflow sensitivity indicating significant influence of financing constraints on Nepalese firm's investment behavior. It documents the evidence of financial market inefficiency, urging for policy prescriptions to address these constraints and spur investment and growth.

Geopolitical risk and investment-cash flow sensitivity: An empirical analysis for Indian business group-affiliated firms and non-business group-affiliated firms

This study empirically examines the effect of GPR (geopolitical risk) on investment–cash flow sensitivity of Indian business group-affiliated firms and non-business group-affiliated (independent) firms. This study finds that GPR increases investment–cash flow sensitivity. Further, this study reveals that the impact of GPR on investment–cash flow sensitivity is less (greater) for business group-affiliated (independent) firms. In addition, the results of this study are robust across alternate measurements of the GPR (GPR Threat & GPR Act), dependent variable, and excluding the crisis & COVID-19 period.

EFEK KONDISI FINANSIAL, STRUKTUR UTANG, DAN CASH HOLDING PADA SENSITIVITAS ARUS KAS INVESTASI

This study aims to analyze the adaptation of companies before the pandemic to post-covid-19. Panel data regression with a fixed model. A sample of 30 companies was divided into two categories, namely companies that experienced problems and those that did not. The sampling technique uses purposive sampling analysis method, secondary data, and panel data with the help of the Eviews statistical tool. The results obtained are partially companies with financial condition (X1) and debt structure (X2) have a positive and significant effect on ICFS. cash holding has no effect on ICFS. Simultaneously the results of financial condition (X1), debt structure (X2), and cash holding (X3) affect the investment cash flow sensitivity variable (Y).
 Keywords: financial condition, debt structure, cash holding, and investment cash flow sensitivity.

What Drives Negative Investment-Cash Flow Sensitivities? Revenue Effect Versus Corporate Life-Cycle Dynamics

In order to identify the economic driver of negative investment-cash flow sensitivities (ICFS), we derive testable predictions from extending a theoretical investment model with endogenous financing costs (“revenue effect”) and contrast them with the corporate life-cycle hypothesis. We find that firms with (i) lower levels of long-term debt display stronger negative ICFS, and (ii) firms with more risky revenues invest more, which contradicts the predictions of the revenue effect. At the same time firms with strongly negative ICFS are (iii) smaller, (iv) younger and (v) have higher growth opportunities, which is consistent with the life-cycle hypothesis.

The 2007/2008 Global Financial Crisis and the Investment-Cash Flow Sensitivities: Some Evidence from an Emerging Market

The 2007/2008 Global Financial Crisis and the Investment-Cash Flow Sensitivities: Some Evidence from an Emerging Market

COVID-19 and investment–cash flow sensitivity: A cross-country analysis

This study investigates investment–cash flow sensitivity during the COVID-19 economic crisis. Using an international sample of publicly listed firms, we find that the sensitivity of capital expenditures to cash flows is significantly reduced during the crisis. When we split the sample into strongly and weakly affected countries, we find that firms in countries affected more seriously by COVID-19 exhibit lower investment responsiveness to cash flows. We further find that investment–cash flow sensitivity is diminished when government aid is greater, firms have more cash on hand, and investment opportunities decline. Our results survive a host of robustness checks. This study contributes to the discussion on the impact of COVID-19 on corporate policies within an international framework.

Corporate governance, information disclosure and investment - Cash flow sensitivity

We investigate the impact of cash flow on investment spending under the scenarios of underinvestment and overinvestment and the moderating effect of corporate governance and information disclosure on the sensitivity of both. The empirical analysis is conducted by selecting listed companies in the manufacturing sector from 2013 to 2020. We find that companies investment is highly sensitive to cash flow under financing constraints and overinvestment due to agency costs. In the case of overinvestment, improving the level of disclosure significantly mitigates investment-cash flow sensitivity; in the case of underinvestment, improving corporate governance significantly reduces investment-cash flow sensitivity.

Can Capital Adjustment Costs Explain the Decline in Investment–Cash Flow Sensitivity?

AbstractIt is well documented that since at least the 1970s investment-cash flow (I-CF) sensitivity has been decreasing over time to disappear almost completely by the late 2000s. Based on a neoclassical investment model with costly external financing, we show that this pattern can be explained by the gradual increase of capital adjustment costs, attributable to the accumulation of knowledge capital. The result is robust to a variety of approaches, including Euler equation estimation and the simulated method of moments. More generally, our findings demonstrate that I-CF sensitivity should only be interpreted as a joint measure of financial and real frictions.

Environmental information disclosure and the investment-cash flow sensitivity

Purpose- In 2008 China issued the Measures for the Disclosure of Environmental Information. Using the introduction of this environmental policy, this paper examines how the environmental information disclosure quality affects a firm's access to capital markets. In particular, the relationship is investigated between the environmental disclosure quality and the investment-cash flow sensitivity, a measure of a firm's financial constraints, before and after the implementation of the policy. Methodology- The content analysis is used to construct the measure of environmental disclosure quality. First of all, the contents of both qualitative and quantitative environmental disclosures are analyzed with respect to the following ten areas reported in firms' annual reports: (1) corporate investment in environmental protection, (2) government financial support related to environmental control, (3) tax reductions related to environmental programs, (4) lawsuits, settlements, penalties, and rewards related to environmental protection, (5) emissions and pollution reduction implementation, (6) certifications of environmental programs, (7) firm environmental protection missions and goals, (8) firm environmental protection plans and strategies, (9) bank loans related to environmental protection, and (10) other environmental-related information. And then, different points are assigned based on the disclosure quality for each of the ten disclosure areas and aggregated to obtain an overall disclosure score. Univariate and regression tests are used to examine the relationship between environmental information disclosures and investment-cash flow sensitivity. Findings- A negative association is found between a firm's environmental disclosure quality and the investment-cash flow sensitivity after the policy was implemented, while no such association is found before the policy implementation. Furthermore, the observed reduction in investment-cash flow sensitivity tends to be stronger for firms in high-polluting industries. Conclusion- Given the environmental policies in emerging markets are often viewed with great doubts, our findings suggest that government environmental policy plays an important role in firm's access to capital markets. Keywords: Environmental information disclosure, investment-cash flow sensitivity, government policy, asymmetric information, financial constraints JEL Codes: G18, G30, G32