K.U.Leuven - Faculty of Economics and Applied Economics
FBE Research Report AFI_0930 pages:1-40
We predict and find empirical support for a negative relation between the firm’s investment-cash flow sensitivity
and cash-cash flow sensitivity, two measures suggested to capture the concept of financing constraints. This negative relation on the firm-level stems from the fact that both investments and the cash account are uses of funds competing for limited available cash flows. Additionally, we find that the investment-cash flow sensitivity is a better predictor for the firm’s constraint-status than the cash-cash flow sensitivity for a longitudinal sample of 1,233 U.S.-based listed firms using an evaluative framework based upon ex-post evaluation of the firmvarying sensitivities.