Thursday, June 7, 2007
Investment-cash flow sensitivity
We spent quite a lot of time in 239D discussing investment-cash flow sensitivity. It is not clear to me why this is an interesting/important topic. What is the significance of Inv-CF sensitivity? Is it simply a proxy for financial constraints (i.e. firms that are constrained have investment that is more sensitive)?
Subscribe to:
Post Comments (Atom)
2 comments:
based on our corporate class, this is one of the major topics of the day in corporate. econ 234c spent more time on I/cf sensitivity than any other topic. (rauh 2006 won the best paper award for work solely on this topic).
more than just financial constraints, its the measure of whether there is assymetric info/friction between internal and external investment opportunities.
early work in this area tried to argue that firms that were financially constrained exhibited more i/cf sensitivity. the kaplan zingales index of financial constraints suggested otherwise, constrained firms didn't seem to exhibit more sensitivity than unconstrained firms propogating the puzzle. key papers related to this include frazarri hubbard peterson, kz and lamont.
Just to repeat what Javed said, it seems to me that Investment CF sensitivity is also to some extent a test of the MM propositions. If an entreprenuer is indifferent to internal financing (CF) or the various forms of external financing (Debt/Equity) then you would not expect a firms investment to vary with its CF.
IF you believe the pecking order theory, where Internal Cash is prefered to Debt to Equity, you might expect I/CF sensitivity.
Post a Comment