Corporate investment and cash flow sensitivity: Evidence from Turkey

The understanding the effects of financial constraints and firms? investment decisions is an important issue of research in macroeconomics and microeconomics areas. From macroeconomics perspective, defining impact of financial constraints on investment decisions provide valuable information about the mechanism through which monetary policy affects real economic. In microeconomics area, understanding the effects of financial constraints contributes to the understating of firms? corporate finance behaviors and the importance of firm heterogeneity in firms? activities. Using a comprehensive firm-level data of Turkish manufacturing firm and employing different empirical strategies and econometric techniques for the period 2009-2012 this thesis work tests impact cash flow of constrained and unconstrained Turkish firm?s on investment. This thesis result following Fazari, Hubbard and Peterson (1988). There is found that financially constrained firms in Turkey have high sensitivity to investment. Furthermore financially constrained firms face restricted access to external financing. These firms are likely to experience high underinvestment cost.