Investment–cash flow sensitivity around the crisis: are African firms different?
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 22 December 2020
Issue publication date: 11 October 2021
Abstract
Purpose
This paper examines the contentious relationship between investment and cash flow using the 2008–2009 credit supply shock as a form of the quasi-natural experiment.
Design/methodology/approach
Panel threshold models with unknown sample separation are estimated for a sample of publicly listed firms from nine African countries over the period 2003–2012. Using this approach reduces subjective or ex ante sample-splitting bias that is not accounted for in the extant literature.
Findings
The findings of the study indicate that investment–cash flow sensitivity is decreasing even during the global financial crisis (GFC) and for firms more likely to be financially constrained. The authors conclude that the usefulness of investment–cash flow sensitivity as a proxy for financial constraints is diminishing over time, even after directly addressing biases from ex ante subjective sample splitting and various forms of endogeneity.
Originality/value
The authors provide new empirical evidence from sharper tests of financial constraints for understudied African firms and highlight the need to relook at the usefulness of investment–cash flow sensitivity as a proxy of financial constraints.
Keywords
Acknowledgements
The authors thank Alfred Yawson ( the editor) and two anonymous reviewers for their insightful comments. The authors also acknowledge the helpful input of Daniel Gyimah, Nadeem Aftab, Thaana Ghalia, Ali Shakil Khan, Ahmad Haboub and seminar participants at the University of Northampton. Chimwemwe Chipeta wishes to acknowledge funding received from the Oppenheimer Memorial Trust. The usual disclaimer applies.
Citation
Machokoto, M., Ibeji, N. and Chipeta, C. (2021), "Investment–cash flow sensitivity around the crisis: are African firms different?", International Journal of Managerial Finance, Vol. 17 No. 5, pp. 733-756. https://doi.org/10.1108/IJMF-04-2020-0162
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited