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Corporate Investments And Financing Constraints. Analyzing Firm-varying Investment-Cash Flow Sensitivities

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Executive Summary

Recent studies in corporate finance estimate firm-varying Investment-Cash Flow Sensitivities (ICFS) when empirically studying financing constraints. The authors go along with this approach but suggest two methodological improvements. First, they estimate firm-varying ICFS by modeling heterogeneous slopes in the investment equation thereby taking into account the dynamics of the underlying investment model. Secondly, they study the drivers of ICFS in an ex-post regression-analysis thereby accounting for non-linear effects and 'Ceteris-paribus'-conditions. The results show that the firm's ICFS is negatively related to size, dividend payout, profitability, and positively related to leverage suggesting a tight link between ICFS and the firm's constraints-status.

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