Investment-Cash Flow Sensitivity and Financing Constraints: A Study of Pakistani Business Group Firms

Abstract

A large discrepancy exists on the use of the investment–cash flow sensitivity as a measure of financing constraints of firms. We examine this discrepancy by considering business group affiliated firms in Pakistan. The study includes 58 group affiliated firms and 32 non-group affiliated firms listed on the Karachi Stock Exchange during 2006- 2010. Results of OLS and 2SLS shows a positive investment-cash flow sensitivity for business group affiliated firms and negative investment cash flow sensitivity for non- group affiliated firms. Additional tests accordingly express that investment-cash flow sensitivity of Pakistani group affiliated firms is significantly lower to non-group affiliated firms.