The Cash Flow-Investment Relationship: International Evidence of Limited Access to External Finance

18 Pages Posted: 2 May 2005

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland; Kent State University; Kent State University Foundation

Sijing Zong

California State University, Stanislaus - School of Business

Date Written: March 2005

Abstract

In efficient and complete financial markets, internal cash flows should have no impact on investment levels; but in inefficient and incomplete markets, the Pecking Order theory contends that there should be a positive relationship. Further, some studies show that investments of financially constrained firms are more sensitive to internal funds than those of less constrained firms but other studies show the opposite. Using comparable recent data on firms in the four largest industrialized countries (US, UK, Japan, and Germany), this study documents that in all four countries, controlling for the investment opportunity set, investment levels are significantly positively influenced by levels of internal cash flows, indicating that firms face limitation in access to external finance and may operate using a pecking order. Further, international differences in investment level sensitivities to opportunities indicate closer outside monitoring of firms in the bank-centered countries.

Keywords: Cashflows, Capex, Japan, pecking order,

JEL Classification: F21, G31, G32

Suggested Citation

Aggarwal, Raj and Zong, Sijing, The Cash Flow-Investment Relationship: International Evidence of Limited Access to External Finance (March 2005). Available at SSRN: https://ssrn.com/abstract=710583 or http://dx.doi.org/10.2139/ssrn.710583

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Kent State University Foundation ( email )

Akron, OH 44325-4803
United States

Sijing Zong

California State University, Stanislaus - School of Business ( email )

Turlock, CA 95382
United States

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