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We investigate the influence of national culture on corporate investment-cash flow sensitivity.We conjecture that national culture shapes managerial perceptions of information asymmetry and agency problems, thus impacting the investment-cash flow relationship. We document empirical evidence in support of our claim. By linking the investment-cash flow sensitivity to cultural differences, our findings show that, while collectivism has an attenuating influence, uncertainty avoidance, power distance, and masculinity have a reinforcing effect on the relationship between cash flow and investment. Our results hold for a sample of 205,268 firmyears across 24 OECD countries between 1990 and 2017 and are robust after accounting for alternative statistical approaches, sample compositions, and measures of cultural dimensions, along with controls for institutional and governmental factors. In addition, by decomposing cash flow into uses and sources of funds in a dynamic multi-equation model, where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash, we find that national culture shapes how firms react to changes in cash flow.

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In the absence of an income statement, earnings can be calculated as cash flow from operating activities (CFO) plus accruals, rather than being stated as the difference between income statement revenues and expenses. Following the study by Christodoulou and McLeay (2014), this paper uses a system of structural regressions with a framework of two simultaneous linear models, allowing the most basic property of accountingdouble entry bookkeepingto be incorporated as a constraint. The paper aims to investigate whether the constrained seemingly unrelated regression (SUR) estimator with two simultaneous models, produces lower out-of-sample prediction errors than each standalone model. We also examine if CFO and accruals are more capable of predicting future earnings than income statement earnings and expenses. Our findings show that in predicting earnings: (1) a system of structural regressions with two constrained simultaneous models produces significantly smaller out-of-sample prediction errors than each separate regression; and (2) accruals and CFO produce smaller out-of-sample prediction errors than earnings and expenses.

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