Investigating cash flow sensitivity of investments: Astudy on firms (listed) in Borsa İstanbul

Costly external financing forces firms to rely more on cash flows generated by their resources and leads to underinvestment. A useful approach to determine the wedge between the cost of internal and external financing is to observe cash flow sensitivity of investments. Firms with a significant investment–cash flow sensitivity are deemed to be financially constrained. Following this approach, this study examines the investment-cash flow sensitivities of non-financial firms that are quoted on Borsa İstanbul for the period of 2002-2014. To observe the cross-sectional differences in investment–cash flow sensitivities, the data were classified into sub-groups in terms of sub-periods and firm characteristics that were assumed to affect the financial constraint levels. The results from the panel data analysis suggest that smaller and younger firms, firms that have no group affiliation, and firms that have lower free float ratio exhibit investment–cash flow sensitivity. Low-dividend firms have the most significant investment–cash flow sensitivity. Without any classification, firms show moderate investment–cash flow sensitivity for the period of 2002–2014. In the crisis period, investments are the most sensitive to cash flows On the other hand, investment–cash flow sensitivity is not significant for macro-economic growth periods. These findings are in line with the argument that investment–cash flow sensitivity is related to financial constraints.