Cash Flow Relationship Research Articles

Financial conditions, financial constraints and investment-cash flow sensitivity: evidence from Saudi Arabia

PurposeThe purpose of this paper is to examine whether the sensitivity of investment to cash flow varies with exogenous financial conditions.Design/methodology/approachA dynamic model of investment based on the Euler equation approach is employed to investigate the impact of macro-financial factors on the sensitivity of investment to cash flow. The sample comprises data from 84 non-financial firms listed on Saudi stock market over the period 2007–2018.FindingsThe results show that the sensitivity of investment to cash flow is positive, implying the presence of financing constraints for Saudi firms. Evidence also reveals that better financial conditions relax firms' financing constraints. However, contractionary monetary policy, poor financial development and liquidity crisis strengthen the dependence of firms on internally generated funds when undertaking new investment projects.Practical implicationsThe empirical results have useful policy implications. First, policymakers should pay attention to the importance of policymaking based on the monetary demand of microeconomic entities. In monetary contraction periods, firms face greater challenges in accessing external finance. These firms are likely to experience under-investment which at a macro level would translate into lower investments and economic growth for the country. Second, policymakers are encouraged to implement complementary measures that, coupled with existing financial reforms, may promote efficiency, competitiveness and transparency in firms' operations. Finally, managers and investors should consider financial structure and condition as important factors in their investment decision.Originality/valueThis study extends previous research by investigating whether the widely reported positive investment and cash flow relationship can be observed using data from an emerging market, specifically Saudi Arabia. It also sheds light on the investment-cash flow debate under a macroeconomic perspective and provides further evidence on the impact of financial crisis on the investment-cash flow (ICF) sensitivity.

Does Cultural Difference Affect Investment–Cash Flow Sensitivity? Evidence from OECD Countries

AbstractWe investigate the influence of national culture on corporate investment–cash flow sensitivity. We conjecture that national culture shapes managerial perceptions of information asymmetry and agency problems, thus impacting the investment–cash flow relationship. We document empirical evidence in support of our claim. By linking the investment–cash flow sensitivity to cultural differences, our findings show that, while collectivism has an attenuating influence, uncertainty avoidance, power distance and masculinity have a reinforcing effect on the relationship between cash flow and investment. Our results hold for a sample of 205,268 firm‐years across 24 OECD countries between 1990 and 2017, and are robust after accounting for alternative statistical approaches, sample compositions and measures of cultural dimensions, along with controls for institutional and governmental factors. In addition, by decomposing cash flow into uses and sources of funds in a dynamic multi‐equation model, where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash, we find that national culture shapes how firms react to changes in cash flow.

Structured Multi-Agent-Based Model for Bankruptcy Contagion With Cash Flow

Numerous multi-agent models have been proposed for various economic phenomena, especially for the bankruptcy contagion phenomenon, which is a seriously destructive occurrence that begins with the bankruptcy of a small group of individuals and spreads to a large scale like an infectious disease. However, almost none of these bankruptcy models can be applied in plural environments or consider the difficulty of implementation. Furthermore, cash flow between firms, which is a highly influential factor in bankruptcy contagion situations, is considered in few such models. To address these shortcomings, in this article, a new relationship, called the cash flow relationship, is first presented based on several relationships related to cash flows. A graphical structure called a cash flow graph is then presented to record cash flow relations between financial institutions and provide a discussion of the nature of the cash flow is then presented. Next, a multi-agent bankruptcy contagion model based on the cash flow graph is introduced. Finally, inferences are drawn from the proposed model and experiments conducted to explore the bankruptcy contagion phenomenon and confirm these inferences. This proposed model can be applied in multiple environments related to cash flows to successfully address the limitations of the existing multi-agent models for bankruptcy contagion.

Investment and Cash Flow Sensitivity under Investment Opportunities: Evidence from Pakistani Manufacturing Firms

This paper examines the relationship between cash flow and investment under high and low investment opportunities of 167 Pakistani non-financial manufacturing firms listed in the Pakistan Stock Exchange during the period 2004-2013. Tobin’s Q is employed to capture the investment opportunities and sales are taken as control variable. A panel regression model is used to investigate the relationship of cash flow, Tobin’s Q and sales on investment. In case of high investment opportunities firms, the relationship of investment and cash flow is positive and significant while under low investment opportunities firms, this relationship is also positive but insignificant. These results indicate that the high opportunities firms rely mostly on internally generated cash flow whereas the low investment opportunities firms prefer to distribute its earnings as a dividend.

Relationship Between Investment and Cash Flow Under High and Low Investment Opportunities: Evidence from Pakistani Manufacturing Firms

This paper examines the relationship between cash flow and investment under high and low investment opportunities of 167 Pakistani non-financial manufacturing firms listed in the Karachi Stock Exchange during the period 2004-2013. Tobin’s Q is employed to capture the investment opportunities and sales are taken as control variable. A panel regression model is used to investigate the relationship of cash flow, Tobin’s Q and sales on investment. In case of high investment opportunities firms, the relationship of investment and cash flow is positive and significant while under low investment opportunities firms, this relationship is also positive but insignificant. These results indicate that the high opportunities firms rely mostly on internally generated cash flow whereas the low investment opportunities firms prefer to distribute its earnings as dividend.

Financial constraints and cash–cash flow sensitivity

This article explores the cash–cash flow relationship by comparing financially constrained and financially unconstrained companies. Unlike previous research, we test the sensitivity of cash to cash flow by considering unlisted firms as constrained and listed firms as unconstrained. Our empirical evidence is based on findings from Spanish firms and is consistent with the core rationale that unlisted firms face more difficulties than their listed counterparts when looking for funding from external markets. As a result, unlisted firms tend to hoard significant amounts of cash out of the generated cash flow, while listed firms do not. Our findings are robust to a number of additional empirical tests.

CEO's personal characteristics, ownership and investment cash flow sensitivity: Evidence from NYSE panel data firms

This study tries to extend previous works on behavioral corporate finance by examining the interaction between investment cash flow sensitivity and various CEO characteristics in either the existence or inexistence of managerial optimism. Using a Q-investment model and departing from a sample of 475 annual observations, our results highlight that CEO's financial education, CEO's ownership and their optimism bias can explain distortions in corporate investment policy since they affect investment cash flow's relationship.

The Investment Cash Flow Relationship: Does National Culture Matter?

We investigate the effect of national culture on corporate investment-cash flow sensitivity. The extant literature on corporate investment explains investment-cash flow sensitivity using agency and asymmetric information theories. In this paper we argue that culture affects perceptions of, and reactions to, agency and information asymmetry. Hence, we expect investment-cash flow sensitivity to be determined not only by objective assessment of the severity of agency and information asymmetry problems in firms, but also by the subjective perceptions of managers, shareholders, and corporate outsiders with regard to these problems. Using Hofstede’s four cultural dimensions (collectivism, uncertainty avoidance, power distance, and masculinity) we find that uncertainty avoidance, power distance, and masculinity have a positive effect on investment-cash flow sensitivity, whereas collectivism has a negative effect for a sample of 109,807 firm-years from 24 OECD countries between 1990 and 2011. Our results hold even after accounting for alternative statistical approaches, sample compositions, and measures of cultural dimensions.

Sensitivity of external resources to cash flow under financial constraints

This paper explores the external financing–cash flow relationship in capital structure theory by comparing unlisted (financially constrained) and listed (financially unconstrained) companies. We postulate that investment is determined endogenously in the case of unlisted firms, as they are strongly dependent on internally generated funds (cash flow). Consequently, unlisted firms invest their cash flow in profitable projects, using any residual cash flow to increase their holdings of safe assets. In turn, listed companies determine their investment exogenously and may reduce leverage if they raise an excess of cash flow. As a result, listed companies would react more negatively to shocks in cash flow. Our findings reveal that both unlisted and listed companies show a negative external financing–cash flow relationship, that of the latter being clearly more intense.

Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets: Private Investment and Cash Flow Relationship Revisited

Summary The paper analyzes the impacts of cash flow from multiple investments in real and financial sectors on the new fixed investment spending of real sector firms. The empirical results based on the Euler equation approach and semi-annual firm level data from two major emerging markets, Mexico and Turkey, suggest that profits and rates of returns from fixed and financial assets have differential effects on fixed investment spending of real sector firms. Accordingly, increasing availability and accessibility of alternative investment opportunities in financial markets can become instrumental in channeling real sector savings to short-term financial investments instead of long-term fixed capital formation and thus lead to deindustrialization.

The Effect of Financial Development on the Investment Cash Flow Relationship: Cross-Country Evidence from Europe

We investigate financing constraints in a large cross-country data set covering most of the European economy. Firm level investment sensitivity to cash flow is used to identify financing constraints. We find that the sensitivities are significantly positive on average, controlling for country and industry fixed effects, as well as firm level controls. Most importantly, the cash flow sensitivity of investment is lower in countries with better-developed financial markets. This suggests that financial development may mitigate financial constraints. This effect is weaker in conglomerate subsidiaries, which are likely to have access to internal capital markets and depend less on the outside financial environment, and possibly for firms in industries with highly liquid assets as well. This result sheds light on the link between financial and economic development.

Investment and cash flow: Asymmetric information or managerial discretion

In recent years, several studies have attempted to explain the positive link between corporate investment and internal cash flows by hypothesizing the existence of asymmetric information. Managers know that the firm has high return investment opportinities, but the capital market does not. An alternative explanation for cash flow's relationship to investment is that managers have the discretion to use the company's cash flows to advance their own interests, and these are positively linked to the growth of the firm. The asymmetric information hypothesis predicts a positive relationship between investment and cash flow for firms with returns on investment above their costs of capital, the managerial discretion hypothesis predicts a positive relationship for firms with returns below their costs of capital. This paper presents evidence consistent with both hypotheses.