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Is the investment-cash flow sensitivity divergent when information is asymmetrically distributed?

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  • Mansour, Walid

Abstract

This paper deals with the asymptotic behavior of the investment-cash flow sensitivity when financing constraints are binding under asymmetrical distribution of information. A booming empirical literature showed that the investment-cash flow sensitivity can be used as a metric to measure financing constraints. Although various critiques have been addressed to this metric, it still is used in theoretical and empirical studies. I consider the bank's deterministic participation constraint, measure financing constraints parsimoniously, and infer a dynamic, linear relationship of the investment-cash flow sensitivity. The major theoretical implications of this paper show a divergence characteristic of the investment-cash flow sensitivity. Indeed, the worsening of the financial contracting terms tends to induce an infinite increase of the sensitivity. In addition, there exists a threshold level beyond which the firm is expected to be more financially constrained in the future and its investment-cash flow sensitivity is deemed to diverge more rapidly.

Suggested Citation

  • Mansour, Walid, 2019. "Is the investment-cash flow sensitivity divergent when information is asymmetrically distributed?," The Journal of Economic Asymmetries, Elsevier, vol. 19(C), pages 1-1.
    • Handle: RePEc:eee:joecas:v:19:y:2019:i:c:1
    DOI: 10.1016/j.jeca.2018.e00111
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    Citations

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    Cited by:

    1. Huynh, Toan Luu Duc & Wu, Junjie & Duong, An Trong, 2020. "Information Asymmetry and firm value: Is Vietnam different?," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    2. Karima Saci & Walid Mansour, 2023. "Risk Sharing, SMEs’ Financial Strategy, and Lending Guarantee Technology," Risks, MDPI, vol. 11(2), pages 1-23, February.
    3. El Ammari, Anis & Vidal, Marta & Vidal-García, Javier, 2023. "European market timing," The Journal of Economic Asymmetries, Elsevier, vol. 27(C).

    More about this item

    Keywords

    Investment-cash flow sensitivity; Capital-market imperfections; Information asymmetry; Monotonicity hypothesis;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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