Abstract:
This article examines the relationship between financial constraints and investment sensitivity-cash flow. To classify companies into two groups—those facing financial constraints and those without—the amount of companies' cash reserves has been considered as the primary classifying variable. It is expected that cash reserves increase companies' ability to exploit profitable investment opportunities. In order to compare the optimal cash reserve model with traditional financial constraint indices, the efficiency of variables such as size, age, dividend payout ratio, and company membership in business groups in determining companies' financial constraints has also been tested. This research is of a correlational type and is based on panel data analysis. In this study, the financial information of 72 companies listed on the Tehran Stock Exchange during the period from 1999 to 2008 was examined (720 company-years). The research findings indicate a positive role of cash reserves in reducing the investment sensitivity-cash flow of companies. On the other hand, no specific superiority was observed in using the optimal cash reserve model compared to traditional financial constraint criteria.
Machine summary:
In order to compare the optimal cash reserve model with traditional financial constraint indicators, the efficiency of size, age, dividend payout ratio, and company membership in business groups variables in determining companies' financial constraints has also been tested.
To perform a comparison between modern and traditional criteria, investment-cash flow sensitivity is estimated using size, age, (1) inailgidoM-relliM (2) tcefreP &%00912MHPG009G% dividend payout ratio and membership in business groups, and using the optimal cash reserve criterion is estimated.
Accordingly, the higher a company's sensitivity of investment expenditures to cash flows, the greater the extent of that company's reliance on its internal resources and therefore, the more financial constraints it will have.
, the relationship between capital expenditures and cash flow has been examined using the following model[5]: (1) iU+iQ2??+iWOLFC1??+a-iI The variables related to the above equation are explained in Table (1): (Refer to page image)A positive and significant coefficient for WOLFC indicates that the company primarily relies on internal resources to finance its investments, which is an indication of the presence of financial constraints.
The present research, in addition to using traditional financial constraint indices to determine the relationship between investment and internal resources (cash flow), places special emphasis on the metric of companies' cash reserves.
The third hypothesis compares the relationship between investment and operating cash flow of classified companies using traditional financial constraint indices.
The coefficient difference test, presented in the last column of Table (5), shows that the probability of the investment-cash flow sensitivity being equal for companies with and without financial constraints is very low.
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