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

2010 ◽  
Vol 10 (1) ◽  
Author(s):  
Bo Becker ◽  
Jagadeesh Sivadasan
Keyword(s):  
Financial Markets ◽  
Financial Development ◽  
Cash Flow ◽  
Set Covering ◽  
Firm Level ◽  
Data Set ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Cross Country ◽  
Financial Environment

Abstract We investigate if financial development eases firm level financing constraints in a cross-country data set covering much of the European economy. The cash flow sensitivity of investment is lower in countries with better-developed financial markets. To deal with potentially serious biases, we employ a difference-in-difference methodology. Subsidiaries of other firms have access to internal capital markets and hence depend less on the external financial environment. As predicted, the benefit of financial development is smaller in subsidiary firms. This shows that financial development can mitigate financial constraints, and sheds light on the link between financial and economic development.

scholarly journals Financing Constraints And Financial Development: Evidence From Selected African Countries

2015 ◽  
Vol 14 (4) ◽  
pp. 655
Author(s):  
Letenah Ejigu Wale
Keyword(s):  
Financial Development ◽  
Cash Flow ◽  
Financing Constraints ◽  
African Countries ◽  
Positive Role ◽  
Firm Level ◽  
Stock Market Development ◽  
Flow Sensitivity ◽  
Sensitivity Coefficients ◽  
Cash Flow Sensitivity

Economic theory posits that financial development eases firm level financing constraints by mitigating information asymmetry and contracting imperfections. This paper empirically tests for this notion by using firm level data from selected African countries. The sampled firms show positive and significant investment cash flow sensitivity coefficients indicating they are financially constrained. Financial development is found to have a significant and negative effect on the estimated cash flow sensitivity coefficients indicating it reduces firm financial constraints. The result further shows that such positive role of financial development is attributed to financial intermediary development and not to stock market development. A unique result to the African reality is that even firms in countries with high level of financial development are financially constrained. This implies the financial development in Africa is too weak and more policy attention is needed in this regard.

Financial Development and the Cash Flow Sensitivity of Cash

2006 ◽  
Vol 41 (4) ◽  
pp. 787-808 ◽  
Author(s):  
Inder K. Khurana ◽  
Xiumin Martin ◽  
Raynolde Pereira
Keyword(s):  
Financial Development ◽  
Cash Flow ◽  
Financial Constraints ◽  
Cash Holdings ◽  
Cash Flows ◽  
External Financing ◽  
Firm Level ◽  
Investment Projects ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity

AbstractPrior research posits that market imperfections and the lack of institutions that protect investor interests create a divergence between the cost of internal and external funds, thereby constraining firms' ability to fund investment projects through external financing. Financial constraints force firms to manage their cash flows to finance potentially profitable projects. A related stream of research documents that financial constraints due to costly external financing are more pronounced in underdeveloped financial markets. We examine the influence of financial development on the demand for liquidity by focusing on how financial development affects the sensitivity of firms' cash holdings to their cash flows. Using firm-level data for 35 countries covering about 12,782 firms for the years 1994–2002, we find the sensitivity of cash holdings to cash flows decreases with financial development. We also consider additional implications of firms' cash flow sensitivity of cash with respect to firm size and business cycles. Overall, we provide new cross-country evidence of the role of financial development on financial constraints.

Debt holdings and investment cash flow sensitivity of listed firms

2018 ◽  
Vol 13 (5) ◽  
pp. 943-958 ◽  
Author(s):  
Johnson Worlanyo Ahiadorme ◽  
Agyapomaa Gyeke-Dako ◽  
Joshua Yindenaba Abor
Keyword(s):  
Cash Flow ◽  
Empirical Modeling ◽  
Empirical Literature ◽  
Data Set ◽  
Content Type ◽  
Listed Firms ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Cash Flow Sensitivities ◽  
Internal Funds

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.

CSR, agency costs and investment-cash flow sensitivity: a mediated moderation analysis

2017 ◽  
Vol 43 (3) ◽  
pp. 299-312 ◽  
Author(s):  
Marwa Samet ◽  
Anis Jarboui
Keyword(s):  
Cash Flow ◽  
Agency Costs ◽  
Data Set ◽  
Content Type ◽  
Mediated Moderation ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Internal Funds ◽  
Investment Spending

Purpose The purpose of this paper is to document the relation between investment-cash flow sensitivity and a firm’s engagement in corporate social responsibility (CSR) activities in European context. Specifically, this paper aims to empirically examine how CSR moderates the sensitivity between investment spending and firm internal funds. Design/methodology/approach The Euler equation technique approach is applied to test the sensitivity of investment to internally generated funds for a panel data set of 398 European companies listed in the STOXX Europe 600 during 2009-2014. Furthermore, a mediated moderation model is developed in order to examine the moderating role of CSR in the investment-cash flow sensitivity, as well as the mediating role of agency costs on the moderation effect of CSR. Findings The results show that CSR performance weakens the sensitivity of investment to internal funds; agency costs of free cash flow mediate the negative moderating effect of CSR on investment-cash flow sensitivity. Thus, this study demonstrates empirically that firms with socially responsible practices are better positioned to obtain financing in the capital markets through reducing market frictions as well as agency costs. Practical implications Firms are invited to engage more in CSR activities that reduce agency conflicts between management and shareholders. Originality/value The originality of this paper consists in proposing the establishment of both direct and indirect link between CSR and investment-cash flow sensitivity.

scholarly journals Accounting Quality and Firm-Level Capital Investment

2006 ◽  
Vol 81 (5) ◽  
pp. 963-982 ◽  
Author(s):  
Gary C. Biddle ◽  
Gilles Hilary
Keyword(s):  
Information Asymmetry ◽  
Cash Flow ◽  
Capital Investment ◽  
Investment Efficiency ◽  
Accounting Quality ◽  
Control Variables ◽  
Firm Level ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity

This study examines how accounting quality relates to firm-level capital investment efficiency. Our first hypothesis is that higher quality accounting enhances investment efficiency by reducing information asymmetry between managers and outside suppliers of capital. Our second hypothesis is that this effect should be stronger in economies where financing is largely provided through arm's-length transactions compared with countries where creditors supply more capital. Our results are consistent with these hypotheses both across and within countries. They are robust to alternative econometric specifications, different measures of accounting quality and investment-cash flow sensitivity, and numerous control variables.

scholarly journals The Impact of Board Size on Firm-Level Capital Investment Efficiency

2016 ◽  
Vol 8 (10) ◽  
pp. 110
Author(s):  
Amy E. Ji
Keyword(s):  
Cash Flow ◽  
Capital Investment ◽  
Board Structure ◽  
Investment Efficiency ◽  
Board Size ◽  
Firm Level ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
Internal Funds ◽  
The Impact

<p>The study aims to examine whether and how board structure is associated with firm-level capital investment efficiency. Specifically, I investigate whether the size of a firm’s board is associated with the sensitivity of investments to the availability of internal funds. I hypothesize and find that board size is inversely related to investment-cash flow sensitivity. Larger boards seem to mitigate investment-cash flow sensitivity by reducing information asymmetry between managers and external capital providers. The study is important as it reveals that board structure influences the corporate investment policy, which is one of the most important firm economic decisions.</p>

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