Is Investment-Cash flow Sensitivity a Good Measure of Financing Constraints? New Evidence from Indian Business Group Firms

R. George, M.R. Kabir, J. Qian

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Abstract

Several studies use the investment - cash flow sensitivity as a measure of financing constraints while some others disagree.The source of this disparity lies mostly in differences in opinion regarding the segregation of severely financially constrained firms from less constrained ones.We examine this controversy by analyzing firms affiliated to business groups that are subject to less financing constraints relative to independent firms.Our results show strong investment - cash flow sensitivities for both group and non-group firms, but no significant difference between them.The finding is robust to alternative investment models and estimation techniques.We investigate this finding further by analyzing the influence of various firm-specific characteristics like size, age, leverage and ownership structure.We continue to observe that less financially constrained firms do not exhibit a significantly lower sensitivity of investment to cash flow.The results of the study thus provide new and compelling evidence demonstrating the inability of investment cash flow sensitivity to be a good measure of a firm's financing constraint.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages40
Volume2005-49
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-49

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Keywords

  • investment
  • cash flow
  • business group
  • financing constraints

Cite this

George, R., Kabir, M. R., & Qian, J. (2005). Is Investment-Cash flow Sensitivity a Good Measure of Financing Constraints? New Evidence from Indian Business Group Firms. (CentER Discussion Paper; Vol. 2005-49). Finance.