Investment- cash flow sensitivity measures investment thirst, but not financial constraint

Kebin Deng, Zhong Ding, Yushu Zhu, Qing Zhou

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Literature streams disagree about the capacity of investment–cash flow
sensitivity (ICFS) to measure both investment thirst and financial constraint.
We argue that ICFS measures the former but not the latter. Therefore, we use
Fazzari et al.’s study (1988) to develop a model to test the relationship between
ICFS and financial constraint, but extend that model using Kornai (1979) to
include investment thirst. We demonstrate: because the ICFS–financial
constraint relationship varies, ICFS cannot measure financial constraint.
Conversely, using a natural experiment of China’s Four Trillion Stimulus
policy, we show ICFS significantly and positively correlates with investment
thirst after controlling for financial constraint.
Original languageEnglish
Pages (from-to)165-197
Number of pages33
JournalAccounting and Finance
Volume57
Issue number1
DOIs
Publication statusPublished - 2017
Externally publishedYes

Keywords

  • investment–cash flow sensitivity
  • financial constraint
  • investment thirst
  • overinvestment

Fingerprint Dive into the research topics of 'Investment- cash flow sensitivity measures investment thirst, but not financial constraint'. Together they form a unique fingerprint.

  • Cite this