Information Asymmetry And Investment-Cash Flow Sensitivity

The research on investment-cash flow sensitivity is one of the main topics in investment theory research.A lot of empirical studies show that cash flow does have notable influence on capital expenditures therefore investment-cash flow sensitivity does exist.Models of information asymmetry predict that companies face financial constraint due to market imperfections would decrease firm investment and increase investment-cash flow sensitivity.Further,they predict the higher financial constraint would bring higher investment-cash flow sensitivity.However,some other studies argue that there is no reason for investment-cash flow sensitivity to increase monotonically with financial constraints.Their predictions also have strong empirical supports.Some other scholars argue that different measurements for financial constraint would bring different result.At present,the hottest debate is how to measure the financial constraint and what's the relationship between financial constraint and cash-flow sensitivity.We use PIN,which is a direct measurement for information asymmetry based on microstructure theory calculated by using high-frequency data from capital market,as the measurement of financial constraint.The higher PIN represents higher asymmetry information,namely higher financial constraint.Since the problem of financial constraint is arising by capital market imperfections,we believe the direct measurements would be better than other indirect measurements such as dividend payout ratio,size,age etc.The analysis prove that the higher the information asymmetry,the lower firm investment,which is consistent with theoretical predictions. Further,we also find the higher the information asymmetry,the higher investment-cash flow sensitivity,namely higher financial constraint would bring higher investment-cash flow sensitivity,which is consistent with the financial constraint theory.We also exam the monotonicity between investment-cash flow sensitivity and financial constraint and the result shows that when firms face low information asymmetry or high information asymmetry,they will have higher investment-cash flow sensitivity compared with those firm faced secondary information asymmetry,which means an unmonotonicity relationship between financial constraint and investment-cash flow sensitivity.The innovation in this paper is reconciling the market microstructure theory and the classic financial research.This innovation is an attempt to bridge the gap between the existing but largely distinct literature on investment in corporate finance and information asymmetry in market microstructure.This paper provides a new direct for investment-cash flow sensitivity research and the conclusions would enrich the theory of financial constraint.The conclusions also have significance to firm investment decisions,financing decisions and information disclosure decisions.