Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series |
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Authors: | Huafeng Chen Shaojun Chen |
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Institution: | a University of British Columbia, Canada b Connor, Clark, and Lunn Investment Management, Canada |
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Abstract: | Investment-cash flow sensitivity has declined and disappeared, even during the 2007-2009 credit crunch. If one believes that financial constraints have not disappeared, then investment-cash flow sensitivity cannot be a good measure of financial constraints. The decline and disappearance are robust to considerations of R&D and cash reserves, and across groups of firms. The information content in cash flow regarding investment opportunities has declined, but measurement error in Tobin's q does not completely explain the patterns in investment-cash flow sensitivity. The decline and disappearance cannot be explained by changes in sample composition, corporate governance, or market power—and remain a puzzle. |
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Keywords: | G01 G31 G32 |
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