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

35 Pages Posted: 28 Nov 2013

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: December 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, Financial flexibility, Investment, Real options and financial constraints

Suggested Citation

O'Connor Keefe, Michael and Tate, James, Is the Relationship between Investment and Conditional Cash Flow Volatility Ambiguous, Asymmetric or Both? (December 2013). Accounting & Finance, Vol. 53, Issue 4, pp. 913-947, 2013, Available at SSRN: https://ssrn.com/abstract=2360831 or http://dx.doi.org/10.1111/acfi.12034

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

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