The impact of capital market imperfections on investment-cash flow sensitivity

School of Business, George Washington University, 2201 G Street, Funger Hall 505, Washington, DC 20052, United States; Pamplin College of Business, Virginia Tech, 7054 Haycock Road, Room 352, Falls Church, VA 22043, United States
Journal of Banking & Finance (Impact Factor: 1.29). 02/2008; 32(2):207-216. DOI: 10.2139/ssrn.686812
Source: RePEc

ABSTRACT We examine the investment-cash flow sensitivity of US manufacturing firms in relation to five factors associated with capital market imperfections - fund flows, institutional ownership, analyst following, bond ratings, and an index of antitakeover amendments. We find a steady decline in the estimated sensitivity over time. Furthermore, we find that investment-cash flow sensitivity decreases with increasing fund flows, institutional ownership, analyst following, antitakeover amendments and with the existence of a bond rating. The overall evidence suggests that investment-cash flow sensitivity decreases with factors that reduce capital market imperfections.

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