The Research On Investment-Cash Flow Sensitivity Based On Enterprise Growth

Investment-cash flow sensitivity is the sensitivity of corporate investment behavior to internal cash flow, and the main current interpretations of the sensitivity are the financial constraint hypothesis and the free cash flow hypothesis.The financing constraint hypothesis is based on asymmetric information theory, and the free cash flow hypothesis is based on agency conflict of business owners and managers. Many researches show that there is investment- cash flow sensitivity in Main Board, while there are few researches focusing on small and medium enterprise board (SME Board). So this paper researches the relationship of investment- cash flow sensitivity and enterprise growth, targeting to SME Board, in order to provide theoretical and realistic basis of how to improve investment and finance.This paper uses the data of SME company between 2007and 2009 as the samples. Firstly, the paper constructs business growth using principal component analysis, and makes multiple linear regression using investment model to verify the existence of investment- cash flow sensitivity in SME Board, as well as the interpretation of the sensitivity is the financial constraint hypothesis. Then it divides sample into two groups according to growth and investigates the differences of sensitivity between the two groups. It finds that the interpretation of both groups is the financial constraint hypothesis, and the group which growth is poorer exists stronger sensitivity than the other one. The degree of financial constrain is greater in the group which growth is poorer than the mean. Then, it analyzes the growth and sensitivity of Main Board, and finds that the growth of SME Board is greater than the growth of Main Board. There exists strong investment- cash flow sensitivity in Main Board, and the interpretations of the sensitivity is the free cash flow hypothesis. Finally, the paper proposes solutions to financing of SME Board companies, such as establishing SME service system, improving the information disclosure system and so on.The innovation of this paper is using business growth to measure investment opportunities rather than Tobin's Q, and it investigates the difference of sensitivity under different growth.