Is the Relationship between Investment and Conditional Cash Flow Volatility Ambiguous, Asymmetric or Both?

Accounting & Finance, 53, 4 (2013), pp. 913-947.

43 Pages Posted: 14 Dec 2012 Last revised: 6 Mar 2014

See all articles by Michael O'Connor Keefe

Michael O'Connor Keefe

Victoria University of Wellington

James Tate

Victoria University of Wellington

Multiple version iconThere are 2 versions of this paper

Date Written: May 28, 2013

Abstract

We investigate the effect of cash flow volatility on investment. Our evidence suggests that financially constrained firms decrease investment (i) when experiencing persistently high volatility; (ii) when experiencing both high volatility and negative cash flow growth realisations; and (iii) when holding low cash levels and experiencing both high volatility and a negative cash flow growth realisations. In financially unconstrained firms the above effects are either not found or are of relatively low economic importance. Overall, our findings lend support to the financial flexibility literature and tend to contradict predictions of the real options literature.

Keywords: Cash Flow Volatility, Investment, Financial Flexibility, Real Options, Financial Constraints

JEL Classification: G32, C23, D21

Suggested Citation

O'Connor Keefe, Michael and Tate, James, Is the Relationship between Investment and Conditional Cash Flow Volatility Ambiguous, Asymmetric or Both? (May 28, 2013). Accounting & Finance, 53, 4 (2013), pp. 913-947., Available at SSRN: https://ssrn.com/abstract=2189124 or http://dx.doi.org/10.2139/ssrn.2189124

Michael O'Connor Keefe (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

James Tate

Victoria University of Wellington ( email )

PO Box 600
Wellington 6140
New Zealand

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
178
Abstract Views
780
rank
206,767
PlumX Metrics