Financing Constraints And Investment-Cash Flow Sensitivities

During the last few decades, the investment-cash flow sensitivity of the enterprises was studied intensively. And the theoretical explanation of investment-cash flow sensitivity has been debated widely. Some scholars demonstrate the positive correlation between investment and cash flow, some prove the negative correlation between investment and cash flow, while others consider the nonmonotonic relationship. The research of the reason mainly has external financing constraints theory and free cash flow theory. Scholars who support the external financing constraints theory consider that the existence of information asymmetry, agent problem and trade cost problem etc. make the cost of external capital higher than the internal capital in the imperfect capital market. So enterprises prefer the internal capital for the high cost. If the enterprise has not enough internal cash flow, and can’t capital financing, strong financing constraints will lead to the problem of insufficient investment. And the scholars who support the free cash flow theory consider that the sensitivity between investment and cash flow attributed to excessive free cash flow. This kind of situation will lead to another extreme appearance—excessive investment. The addition of internal cash flow will increase investment.This paper is base on the above theory and uses the empirical data verify the sensitivity between investment and cash flow, also include the reason of the relation for the real estate industry. As we all know, the real estate industry in our country has its own particularity and effected by policy sensibly. The country has issued a series of policy measures to limit the high price since the house price increase rapidly. This article selected the data of estate industry in2005-2010as the sample. Then defined the main index and set up appropriate model for explaining the sensitivity between investment and cash flow. The result shows that:(1) There are positive correlation between investment and cash flow in the whole sample. Investment increases with the increase of internal cash flow,decreases with the decrease of internal cash flow.This can also support FHP88.(2)The model introduce interactional index of cash flow and investment(CFi,t-1/Ki,t-1×Qi,t-1), which demonstrate the reason of investment cash flow sensitivity according to vogt’s method(1994).The result shows that the external cash flow theory can explain the sensitivity perfectly.To a certain degree,this result proves the correlation between investment and cash flow in our estate industry.It is good for choosing correct financing channels and investment strategy methods.