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Why Did the Investment–Cash Flow Sensitivity Decline over Time?

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  • Wang, Zhen
  • Zhang, Chu

Abstract

We propose an explanation for why corporate investment used to be sensitive to cash flow and why the sensitivity declined over time. The sensitivity stems from the informational role of cash flow in inferring the productivity of tangible capital in the old economy. Over time, however, more new-economy firms enter the market. These firms have reduced tangible capital productivity and reduced cash-flow predictability, which drives the decline in the average investment–cash flow sensitivity. Theoretical and empirical analyses support this explanation.

Suggested Citation

  • Wang, Zhen & Zhang, Chu, 2021. "Why Did the Investment–Cash Flow Sensitivity Decline over Time?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 2272-2308, September.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:6:p:2272-2308_13
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    Cited by:

    1. Wang, Xun, 2022. "Financial liberalization and the investment-cash flow sensitivity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    2. Palmeira, Rafael & Pindado, Julio & Requejo, Ignacio, 2023. "How does employment protection legislation affect labor investment inefficiencies?," Research in International Business and Finance, Elsevier, vol. 66(C).

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