Investment-Cash Flow Sensitivity and Financial Constraints: Indonesia Evidence

Author (s)

(1)  Christin Eunike   (Universitas Kristen Petra)  
(2) * Mariana Ing Malelak   (Universitas Kristen Petra)  
(*) Corresponding Author


Capital market imperfection has made the firms rely on internal cash flow as an investment funding (Investment-cash flow sensitivity). Using data from a sample of 139 non-financial firms listed in Indonesia Stock Exchange from 2010 to 2017, this paper examines whether Investment-cash flow sensitivity (ICFS) could be found in Indonesia and to test by how much ICFS in financially constrained and unconstrained firms are. The method used in this study is panel data set using E-views 9 Software to estimate investment-cash flow sensitivity. In addition, we construct financial constraints measure by extracting Principal Component Analysis with three different measures, the probability of paying a dividend, bond ratings, and firm size. The result shows that cash flow is positive and statistically significant to investment. Furthermore, Investment-cash flow sensitivity is found to be higher for financially constrained firms. To conclude, this paper provides a supporting evidence the precense of ICFS in Indonesia


Investment-Cash Flow Sensitivity, Financial Constraints

Full Text: PDF


[1] Fazzari S, Hubbard R, and Petersen B 1988 Financing constraints and corporate investment

Brookings Papers on Economic Activity

[2] Myers S 1984 The capital structure puzzle The Journal of Finance

[3] Akerlof G 1970 The market for “Lemons”: Quality uncertainty and the market mechanism The

Quarterly Journal of Economics 488-500

[4] Cao S and Leung D 2016 Financial constraints and productivity: Evidence from Canadian SMEs

Staff Working Paper.

[5] Denis D and Osobov I 2008 Why do firms pay dividend? International evidence on the

determinants of financial constraints: Evidence from the time series Journal of Financial


[6] Chen H and Chen S 2010 Investment-cash flow sensitivity cannot be a good measure of financial

constraints: Evidence from the time series. Journal of Financial Economics

[7] Lemmon M and Zender J 2016 Asymmetric information, debt capacity, and capital structure.

Journal of Financial and Quantitive Analysis 1161-1187

[8] Farre-Mensa J and Ljungqvist A 2013 Do measures of financial constraints measure financial

constraints? National Bureau of Economic Research Working Paper Series

[9] Modigliani F and Miller M 1958 The cost of capital, corporation finance and theory of investment

The American Economic Review 261-297

Article View

Abstract views : 874 times | PDF files viewed : 224 times


  • There are currently no refbacks.

Copyright (c) 2018 PROCEEDINGS OF ICEBAM

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.