Relationship Between Investment and Cash Flow Under High and Low Investment Opportunities: Evidence from Pakistani Manufacturing Firms
This paper examines the relationship between cash flow and investment under high and low investment opportunities of 167 Pakistani non-financial manufacturing firms listed in the Karachi Stock Exchange during the period 2004-2013. Tobinâ€™s Q is employed to capture the investment opportunities and sales are taken as control variable. A panel regression model is used to investigate the relationship of cash flow, Tobinâ€™s Q and sales on investment. In case of high investment opportunities firms, the relationship of investment and cash flow is positive and significant while under low investment opportunities firms, this relationship is also positive but insignificant. These results indicate that the high opportunities firms rely mostly on internally generated cash flow whereas the low investment opportunities firms prefer to distribute its earnings as dividend.
2. Ascioglu, A. H. (2007). Information Asymmetry and Investment Cash Flow Sensitivity. Journal of Banking and Finance, 1036-1048.
3. Athey, M. J., & Reeser, W. D. (2000). Asymmetric Information, Industrial Policy, and Corporate Investment in India. Oxford Bulletin of Economics and Statistics, 62(2), 267-292.
4. Champan, D. J. (1996). Cash flow and firm"s investment behaviour. Applied Economics, 28, 1037-1044.
5. Charlton, W. L. ( 2002). Industry and liquidity effects on corporate investment and cash flow relationship. The journal of applied business research, 131-142.
6. Chen, Q. G. (2007). Price Informativeness and Sensitivity to Stock Price Investment. The Review of Financial Studies, 20(3), 619-650.
7. Chirinko, R. a. (1995). Why Does Liquidity Matter in InvestmentEquations? Journal of Money, Credit and Banking, 27(2), 527-548.
8. Cleary, C. (1999). The Relationship Between Firm Investment and Financial Status. The. The Journal of Finance, 54(2), 673-692.
9. Cleary, C. (2000). The Sensitivity of Candia Corporate Investment to Liquidity. Canadian Journal of Administrative Sciences, 17 (3) 217-232.
10. Degryse, H. &. (2005). Investment and Internal Finance: Asymmetric Information or Managerial Discretion? . International Journal of Idustrial Organization, , 125-147.
11. Fazzari, S. a. (1993). Working Capital and Fixed Investment: New Evidence on Financing Constraints. Rand Journal of Economics, 24(3), 328-342.
12. Fazzari, S. H. (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity I, 141-195.
13. Gilchrist, S. a. (1995). Evidence on the Role of Cash Flow forInvestment. . Journal of Monetary Economics, 36,, 541-572.
14. Hoshi, T. K. (1991). Corporate Structure Liquidity and Investmetn : Evidence from Japanees Panel Data. Quarterly Journal of Economics,106,, 33-60.
15. Jafari H. (2004). The relationship between IOS with debt level and operating cash flow,. M.A. dissertation, Tehran.
16. Jalivand, A. a. (1984). Corporate Behaviour In Adjusting to Capital Structure and Dividend Targets: An Economic Study. Journal of Finance,, 33-60.
17. Kadapakkam, P. K. (1998). The Impact of Cash Flows and Firm Size on Investment: the Inernational Evidence. Journal of Banking and Finance, 22, 293320.
18. Kaplan, S. a. (1997). Do Investment-Cash Flow Sensitivities Provide useful Measures of Financing Constraints? The Quarterly Journal of Economics, 112., 169-215.
19. Kee H. Chung, P. W. (1998). Investment opportunities and market reaction to capital expenditure decisions,. Journal of Banking & Finance 22 , 41-60.
20. Kholdy, S. a. (2001). Internal Finance and Corporate Investment. The Financial Review,37 (2), 97-114.
21. Lamount, O. (1997). Cash Flow and Investment: Evidence from Internal Capital Markets. The Journal of Finance, 52(1), 83-109.
22. Lang, L. O. (1996). Leverage, investment, and firm growth. Journal of Financial Economics, 40(1),, 3-29.
23. Modigliani, F., & Miller, H. M. (1958, June). The Cost of Capital, Corporation Finance and Theory of the Investment. The American Economic Review, 48(3), 261-297.
24. Myers, S. C. (1984). Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have. . Journal of Financial Economics, 13, 187-221.
25. Oliner, S. a. (1989). Internal Finance and Investment: Testing the Role of Asymmetric information and Agency Cost. Working Paper (101), Economic Activity Section, Division of Research and Statistics, Federal Reserve System, Oliner.
26. Pawlina, G. &. (2006). Is Investment Cash Flow Sensitivity Caused by Agency Costs or Asymmetric Information? Evidence from the U K. . European Financial Management Journal, 11(4), 483-513.
27. Rahman, M. A. (2004). The Impact of Cash Flow on Investment: The Case of Jorden. Coventry University, jordan.
28. Rizzo, J. a. (1995). Financing Constraints and Investment: New evidence form the Hospital Industry Data. Journal of Money, Credit and Banking, 27(4), 1002-1014.
29. Robert E. Carpenter, A. G. (2003). Cash Flow, investment, and investment opportunities: New tests using UK panel data. Discussion Paper, 1-34.
30. Schaller, H. (1993). Asymmetric Information, Liquidity Constraints, and Canadian Investment. Canadian Journal of Economics, 36 (3), 552-574.
31. Stiglitz J. and Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The American Economic Review, 71(3), 393-410.
32. Thirumalaisam, D. R. (2013). Firm Growth and Retained Earnings Behavior â€“ A Study on Indian Firms. European Journal of Business and Management , Vol.5, No.27 , 40-57.
33. Tobin, J. (1969). A General Equilibrium Approach to Monetary Theory. Journal of Money, Credit, and Banking, 15-29.
34. Watson, W. a. (2002). Small and Medium Size Enterprise Financing: A Note on some of the Empirical Implication of a Pecking Order. Journal of Business Finance and Accounting, Vol. 29, 557-578.
Authors retain the copyright of their manuscripts, and all Open Access articles are distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided that the original work is properly cited.