Cash Flow Sensitivities of Financial Decisions: Evidence from an Emerging Market

Purpose The purpose of this paper is to examine the effect of debt holdings on the sensitivity of firms’ investment to availability of internal funds. Design/methodology/approach For a panel data set of 27 Ghanaian listed firms for the period 2007–2013, the paper applies the Euler equation approach to the empirical modeling of investment. Findings The study finds support for the assertion that listed firms face less severe corporate control problems and lower financing constraints, and thus, have lower investment cash flow sensitivities. The study also finds that a significant positive sensitivity of investment to internal funds is associated with firms that have high debt holdings. Practical implications An implication of this study is that firms with high debt holdings 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. Originality/value Empirical literature document that in the presence of market imperfections, investments of financially constrained firms become sensitive to the availability of internal finance. There are also contradictory evidences regarding the pattern of the observed investment cash flow sensitivity. This study examines the effect of debt holdings on the sensitivity of firms’ investment to availability of cash flow. This is yet to be empirically tested despite some theoretical explanations.

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Debt financing puzzle and internationalization

Journal of Asia Business Studies ◽

10.1108/jabs-01-2017-0001 ◽

2019 ◽

Vol 13 (1) ◽

pp. 33-56 ◽

Cited By ~ 1

Author(s):

Karren Lee-Hwei Khaw

Keyword(s):

Multinational Corporations ◽

Emerging Market ◽

International Perspective ◽

Debt Financing ◽

Primary Concern ◽

Firm Risk ◽

Content Type ◽

Financial Decisions ◽

Business Operations

PurposeThis study aims to examine the relation between long-term debt and internationalization in the presence of the agency costs of debt and business risk.Design/methodology/approachSample firms consist of 517 non-financial listed firms in Malaysia, with 4,197 firm-year observations from the year 2000 to 2014. This study uses panel data regressions and a series of robustness tests to examine the hypotheses.FindingsThe results show that multinational corporations (MNCs) are more likely to sustain less long-term debt than domestic corporations (DCs) to mitigate the costs related to agency problem and firm risk. Meanwhile, foreign-based MNCs maintain less long-term debt than local-based firms, and the finding is more significant at a higher degree of internationalization. Robustness tests confirm the negative relations.Research limitations/implicationsThe findings indicate that the ongoing debate on the debt financing puzzle can be explained by internationalization. Moreover, the findings suggest that in addition to the systematic differences between MNCs and DCs, studies on the debt financing and internationalization should also account for the systematic differences among MNCs such as the local-based MNCs, foreign-based MNCs and DCs that later expand their business operations abroad.Practical implicationsMNCs have to be responsive to the diverse institutional environments as they diversify their business operations geographically. When the adverse effects of internationalization outweigh the benefits, MNCs could use the long-term debt financing decision to mitigate the costs of doing business abroad. This is because debt financing is also a primary concern in the corporate financial decisions for the maximization of shareholders’ wealth.Originality/valueThis study contributes to the debt financing literature from the international perspective by providing evidence from an emerging market. In addition, this study highlights the importance of recognizing firms by their firm-specific characteristics, such as internationalization, given the systematic differences among firms.

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Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091516500193 ◽

2016 ◽

Vol 19 (03) ◽

pp. 1650019 ◽

Cited By ~ 1

Author(s):

Surenderrao Komera ◽

P. J. Jijo Lukose

Keyword(s):

Capital Structure ◽

Cash Flow ◽

Emerging Market ◽

Adjustment Costs ◽

Group Affiliation ◽

Cross Sectional ◽

Speed Of Adjustment ◽

Business Group Affiliation ◽

Optimal Leverage ◽

Target Leverage

In this paper, we examine firms' capital structure adjustment behavior and estimate their “speed of adjustment” toward optimal leverage ratios by employing a dynamic, partial adjustment model. We find that sample firms on an average offset half of the deviation from their target leverage ratios in less than one and half (1.41) years. Such evidence suggests optimal capital structure behavior among sample firms. Further, we report cross sectional heterogeneity and asymmetry in speed of adjustment estimates, resulting from varied leverage adjustment costs across the sample firms. We find higher speed of adjustment estimates among larger sample firms suggesting higher leverage adjustment costs for smaller firms. Business group affiliation does not seem to influence the costs of sample firms' leverage adjustment. Over-levered firms report higher speed of adjustment estimates, suggesting that sample firms do not consider debt financing as a “disciplining mechanism” for managers. Further, we find lower speed of adjustment estimates for sample firms with higher cash flow, implying that Indian markets do not actively accommodate firms' cash flow needs. Thus, our findings reveal complex asymmetric information problems and consequent varied leverage adjustment costs among emerging market firms.

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Corporate Sustainable Growth and the Financing of Innovation

International Journal of Social Ecology and Sustainable Development ◽

10.4018/ijsesd.2013100104 ◽

2013 ◽

Vol 4 (4) ◽

pp. 43-64 ◽

Cited By ~ 1

Author(s):

Amani Kahloul ◽

Ezzeddine Zouari

Keyword(s):

Cash Flow ◽

Adjustment Costs ◽

Cash Flows ◽

Sustainable Growth ◽

Flow Sensitivity ◽

Asymmetric Pattern ◽

Cash Flow Sensitivity ◽

Cash Flow Sensitivities ◽

Flow Components ◽

Transitory Component

R&D investments are a channel for growth, at the macro and micro levels. However, they are known to be characterized with high adjustment costs, therefore, it is generally admitted in the literature that firms try to smooth their R&D investments in face of shocks to internal finance, and the literature supposes that the observed investment – current cash-flow sensitivities are downward biased because R&D expenses are expected to respond to the permanent component of cash-flow but not to its transitory component. However, very few proofs, if at all, exist on the link between R&D and cash-flow components and its implications in terms of its contribution to the corporate sustainable growth. The authors decompose cash-flow into its permanent and transitory components and provide formal evidence that R&D- current cash-flow sensitivity is downward biased and that R&D- permanent cash-flow sensitivity better informs about the contribution of cash-flow to R&D smoothing, which shows a managerial commitment to sustainability. Unexpectedly, and in spite of the negligible observed sensitivities of R&D to the transitory component of cash-flow, the authors’ regressions reveal that these sensitivities have an asymmetric pattern: they are higher when cash-flow is expanding than when it is declining. This reveals a managerial preference for immediate growth, which jeopardizes sustainable growth, because of the risk of costly liquidation inherent to the reliance on the volatile transitory cash-flows.

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Investment and Cash Flow: New Evidence

Journal of Financial and Quantitative Analysis ◽

10.1017/s002210901600065x ◽

2016 ◽

Vol 51 (4) ◽

pp. 1135-1164 ◽

Cited By ~ 42

Author(s):

Jonathan Lewellen ◽

Katharina Lewellen

Keyword(s):

Measurement Error ◽

Cash Flow ◽

Strong Evidence ◽

Investment Decisions ◽

Free Cash Flow ◽

Financing Constraints ◽

Flow Problems ◽

Cash Flow Sensitivities ◽

New Evidence

We study the investment–cash flow sensitivities of U.S. firms from 1971–2009. Our tests extend the literature in several key ways and provide strong evidence that cash flow explains investment beyond its correlation with q. A dollar of current- and prior-year cash flow is associated with $0.32 of additional investment for firms that are the least likely to be constrained and $0.63 of additional investment for firms that are the most likely to be constrained, even after correcting for measurement error in q. Our results suggest that financing constraints and free-cash-flow problems are important for investment decisions.

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