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Investment-cash flow sensitivity and financial constraints: evidence from Pakistan

Yasir Riaz (NUST Business School, National University of Sciences and Technology, Islamabad, Pakistan)
Yasir Shahab (University of International Business and Economics, Beijing, China)
Robina Bibi (NUST Business School, National University of Sciences and Technology, Islamabad, Pakistan)
Shumaila Zeb (Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad, Pakistan)

South Asian Journal of Global Business Research

ISSN: 2045-4457

Article publication date: 17 October 2016




The purpose of this paper is to provide new insights about investment-cash flow sensitivities (ICFS) as a representative of financial constraints, by examining panel data consisting of 288 listed firms in Pakistan.


This study uses a panel data methodology and first difference generalized method of moments to control the problems of heterogeneity and endogeneity. By five different criteria, estimations are made for full and pre-classified sub-samples. Sargan test and Arellano-Bond serial correlation statistic are used for identification and validation of instruments and model.


According to the results, the ICFS has increased monotonically with the level of financial constraints. Further, the results depict that ICFS for the constrained group is much higher as compared to the unconstrained group. Overall, the result illustrates positively significant ICFS.

Practical implications

This study confirms signs of imperfections in the capital market, which leads to financial markets inaccessibility preceded by high under-investment costs and low social and economic development. Thus, proper policy designing and instigation are necessary for the subsidies, taxation, and foreign direct investment and later for financial market development and promotion of private corporate investment.


Previous studies have mostly focused on developed countries where large listed companies work in well-developed financial markets and do not face severe financial constraints because of the greater market integration (Bekaert et al., 2011, 2013) and superior investor protection laws (Djankov et al., 2008; La porta et al., 1998). However, this study focuses on listed companies from the emerging Pakistani market, which will bring forth the interesting aspects of ICFS and will enhance the existing literature effectively.



Riaz, Y., Shahab, Y., Bibi, R. and Zeb, S. (2016), "Investment-cash flow sensitivity and financial constraints: evidence from Pakistan", South Asian Journal of Global Business Research, Vol. 5 No. 3, pp. 403-423.



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