Do Firms’ Financial Constraint Can Be Identified By Their Investment-Cash Flow Sensitivity?

Abstract

In this report, the relationship of financial constraints and the investment cash flow sensitivity is observed by taking the German firms as samples and the main focus is to find out whether the relationship is monotonic or not. Interestingly, I found that investment cash flow sensitivity is neither monotonically increasing or decreasing while taking the most commonly used proxies of financing constraints. In a nutshell, my study suggests that financial constraints may hardly be identified by higher or lower investment cash flow sensitivities, at least for the sample of data of German firms that have been used in this study.