Accounting Conservatism, Internal Net Worth And Investment-cash Flow Sensitivity

Both information asymmetry and agency problems can influence therelationship between investment and internal cash flow. But most of theearlier researches only used one theory to explain the reason. We want touse both of the theories to discuss the sensitivity between investment andinternal cash flow. So this paper chooses the accounting conservatism torepresent the severity of both problems.This paper’s is based on the research method of FHP(1988), and theresearch observation is comprised of3,282selected data frommanufacturing companies listed in Shanghai and Shenzhen stock exchangemarket between2007-2012. The main conclusions are as follows: whencorporations need external financing, the severity of financial constraints ispositively related with the sensitivity between investment and internal cashflow. But when firms don’t need external financing, the results areinconsistent with the hypothesis.This paper’s results suggest that corporations can ease the financialconstraints to expand investment scale by improving their accountingconservatism.