Research On The Sensitivity Of Investment And Cash Flow In Domestic Listed Companies

The interaction between investment and financing decisions is arguably the central issue in corporate finance. It is now well-established that a firm’s financing choices can affect its investment decisions because taxes, issue costs, agency conflicts, and information problems will affect the firm’s cost of capital. The difference between the internal funds and external funds will alter managers’ incentives to take different types of projects. As the basis of the growth of the corporation and the future cash flow, the investment has impacts on the level of profits, the company’s operating risks, and the evaluations from the capital markets. The investment is an important factor of the macroeconomic and the microeconomic and the capital market.The sensitivity of investment to cash flow studies the interaction between the cash flow in the corporation and the investment. It is the central issue in recent20years. Many foreign scholars find the interaction between cash flow in the corporation and the investment has notable positive correlation. The foreign scholars give two theories to explain the sensitivity of investment to cash flow. One theory is the asymmetric information theory, this causes the internal fund is less costly than external funds, as a result, the corporation prefers the internal fund as the resource of the investment. The other explanary is the agency problems, the target of the managers and the shareholders is not equal, so the managers will abuse the cash flow in the corporation.The sample of my article is1600listed corporations in the Shanghai Stock Exchange and Shenzhen Stock Exchange, the basis of my article is Q theory, the method of my article is OLS regressions, the article analyses the investment-cashflow sensitivity of the listed corporations in China to test whether the sensitivity of the investment and the cash flow exists. We find that the interaction between cash flow and investment has notable positive correlation, but the interaction between the investment and the Tobin’Q is not revelant.We classify the company according to the scale of the company, we find that the sensitivity of large-scale corporations’investment and cash flow is big, but the interaction between the small-scale corporations’investment and cash flow doesn’t show linear relationship.We classify the company according to the scale of the debt, we find that the investment-cashflow sensitivity of the company that has large debt is very large,but the investment-cashflow sensitivity of the company that has small debt is not obvious.We classify the company according to the financing constraints to test the impact of the financing constraints. We find that the investment-cashflow sensitivity of the unconstrained firms is very large, but the investment-cashflow sensitivity of the constrained firms is not obvious.The last part is based on the previous theoretical analysis and empirical testing to draw conclusions and make recommendations on this.There are two innovations in this paper. First, we add the changement of the corporation’s stock price to the relation of the investment and cashflow. In the previous, most Chinese article only considered the impact of the Tobin’s Q, but didn’t consider the impact of the corporation’s stock price. Secondly, we classify the firms according to FCFF to testify whether the firms is financing constrained.