Investment-Cash Flow Sensitivity and Financial Constraints–Evidences from British Firms
Zuwei Yu1 , Biao Zhang2 , Ji-shu Shao3, Hongwei Hu4, Sulang Liu5
COMPUTER MODELLING & NEW TECHNOLOGIES 2014 18(12C) 895-903
1 School of Economics and Management, Ningbo University of Technology, Ningbo city, Zhejiang Province, China, 315211
2 Quality Development Institute, Kunming University of Science & Technology, Kunming city, Yunnan Province, China,650051
3 School of Economics and Management, Ningbo Dahongying University, Ningbo city, Zhejiang Province, China, 315175
4School of Humanities and Social Science, North China Electric Power University, Baoding city, Hebei Province, China, 071003
5Department of Economics, Queen Mary, University of London, London, British
This paper investigates the relation between financial constraint and the sensitivity of investment to internal cash flow. The regressions are run by using a large panel of publicly traded non-financial British firms. The sample is sorted and divided into sub-samples by means of applying most objective and commonly used proxies of financing constraints including leverage and other proxies. Our result shows that investment cash flow sensitivity is neither monotonically increasing nor decreasing when the proxies change. The hypothesis of monotonicity is violated empirically in our study. Conversely, an M-shaped curve is observed when leverage is used as the proxy.