Determinants of Investment Cash Flow Sensitivity

I classify firms into groups of high, low, and negative sensitivity. I find that investment-cash flow sensitivity is nonmonotonic with respect to financial constraints, cash flows, and growth opportunities. Firms classified as negative cash flow sensitive have the lowest cash flows, highest growth opportunities, and appear the most financially constrained. Cash flow insensitive firms have the highest cash flows, lowest growth opportunities, and appear the least financially constrained. To a large extent, the negative relationship between cash flow and investment is driven by the opposite trends followed by investment and cash flow, as firms grow through stages of their life cycle.