The impact of capital market imperfections on investment–cash flow sensitivity

Institutional investment horizon and investment–cash flow sensitivity

“…The estimated coefficient on (CF t /A tÀ1 Â IO tÀ1 ), reported in Model 2, is negative but not significant. The negative sign is consistent with the results of Goergen and Renneboog (2001) and Agca and Mozumdar (2008), while the insignificance of the coefficient on institutional ownership is in line with the findings of Agrawal and Knoeber (1996) and Karpoff et al (1996), among others. These results corroborate our argument that the ability of aggregate institutional holdings to proxy for institutional monitoring is limited since it does not account for institutions' monitoring incentives.…”

“…This, in turn, will translate into lower sensitivity of investment spending to cash flows. Consistent with this view, Goergen and Renneboog (2001) and Agca and Mozumdar (2008) show that ICFS decreases with institutional ownership. We contribute to this relatively new yet burgeoning line of research by analyzing the impact of institutional investors' investment horizon on the sensitivity of corporate investment to internal funds.…”

“…For example, Cleary et al (2007) provide evidence from a sample that supports alternative conclusions when they use different classification criteria for financial constraints. Recent studies examine the role of corporate governance in influencing the elasticity of investment to cash flows (e.g., Agca and Mozumdar, 2008); the premise is that good corporate governance will improve both monitoring and information quality, thus reducing agency costs and informational asymmetry problems. Picking up on this point, in this paper we empirically examine the role of institutional investors' investment horizon (IIIH) in affecting the response of firm investment to internal cash flows for a large panel of US firms from 1981 to 2008.…”

Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments

“…They do not report findings for R&D and do not explore why ICF sensitivities may have declined, but they do speculate (p. 929) that ''two possible explanations for this development lie in improved informational efficiency of capital markets, and the increased supply of funds to capital markets resulting in easier access to external capital, especially for small, high-growth firms." Agca and Mozumdar (2008) also report a substantial decline in the physical ICF sensitivity for manufacturing firms over rolling ten year periods between 1970 and 2001 and show that the physical ICF sensitivity decreases with five factors that arguably reduce capital market imperfections. We are not aware of other published studies that directly examine changes in the ICF sensitivity over time.…”

“…First, we provide a systematic documentation of what has happened to the ICF sensitivity over time. The only other studies to examine the ICF sensitivity over relatively long periods of time are Allayannis and Mozumdar (2004) and Agca and Mozumdar (2008), both of which show a substantial decline in the ICF sensitivity for physical investment over time. We expand on these studies by considering R&D and total investment in addition to physical investment.…”