FINANCIAL DISTRESS OF COMPANIES AND CASH FLOW-INVESTMENT-SENSITIVITY: EVIDENCE FROM PANEL OF NON-FINANCIAL FIRMS

Abdul Haque; Ammar Abid; Muhammad Ali Jibran Qamar; Sohaib Asif

doi:10.20472/ES.2019.8.1.004

Authors

Abdul Haque Department of Economics, COMSATS University Islamabad, Lahore Campus, Pakistan Author
Ammar Abid Department of Management Sciences, COMSATS University Islamabad, Lahore Campus, Pakistan Author
Muhammad Ali Jibran Qamar Department of Management Sciences, COMSATS University Islamabad, Lahore Campus, Pakistan Author
Sohaib Asif Department of Management Sciences, COMSATS University Islamabad, Lahore Campus Campus, Pakistan Author

DOI:

https://doi.org/10.20472/ES.2019.8.1.004

Keywords:

Corporate Investment, Financial Constraints, Cash Flow Investment , Sensitivity Internal Funds, -Shape Investment Curve

Abstract

This paper investigates the effects of cash flow–investment sensitivity for firms facing varying levels of financial distress. For this purpose, cash flow, dividend policy, firm age, and size are used to create subsamples of firms facing different degrees of financial constraints. Using an unbalanced panel of 336 non-financial firms listed on the Pakistan Stock Exchange over the period 2006–2017, the study provides evidence that prevailing financial constraints affect firms’ investment decisions. Financial distress, as identified by cash flow, dividend policy, and firm size, increases with higher cash flow–investment sensitivity, thereby supporting the use of these measures as indicators of financial distress. Furthermore, evidence of a U-shaped investment curve is found when the sample is divided based on cash flow, suggesting a non-linear relationship between cash flow and investment. The results also highlight the link between financial and real economic downturns, suggesting the need for countercyclical economic policies with respect to financial and credit conditions.

Data:
Received: 9 Mar 2019
Revised: 26 Apr 2019
Accepted: 6 Jun 2019
Published: 20 Jun 2019