School of Business publications portal
This portal is no longer updated. Aalto University School of Business Master's Theses are now in the Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2015
Thesis number: 14215
Investment cash flow sensitivity still exists among private European companies. New evidence from Western Europe
Author: Hauru, Matias
Title: Investment cash flow sensitivity still exists among private European companies. New evidence from Western Europe
Year: 2015  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; investoinnit; investment; kassavirta; cash flow
Pages: 57
Key terms: Investment cash flow sensitivity; financial constraints; financial crisis; external finance; asset tangibility; physical investment; cash flow financing

Motivated by debates on investment-cash flow sensitivity, its relation to financial constraints and its documented decline globally, this study examines whether companies' capital expenditures are still sensitive to cash flows or whether the phenomena has disappeared and become economically insignificant as suggested by Chen and Chen (2012) among others. Furthermore, I examine whether there are differences in ICF sensitivity between companies more and less likely to be financially constrained by using several different measures as proxies for financial constraints. The paper contributes to existing literature by expanding the research to privately-owned companies compared to publicly listed companies in earlier studies.


The sample for my tests uses annual data from 2005 to 2012 for European unlisted firms. To be consistent with previous literature, only firms from manufacturing industry are included. The sample companies have at least $1 million of total assets at least in one of the sample years. The companies are from so-called PIIGS countries or strongest euro zone economies, as I try to examine whether the strength of the economy and its' banking sector has contributed to the cash-flow dependency of investment. In the end, the sample consists of 10 336 firm-year observations from 1687 different companies. The empirical model follows Fazzari et al. (1988) as well as numerous other papers (see e.g. Ding et al. (2013) and Chen and Chen (2012)) Like earlier papers, I estimate all of the equations by using Generalized Method of Moments (GMM) approach with fixed effects model to control for time and company invariant effects. Lagged values of the regressors are used as instruments to control for the possible endogeneity of regressors.


Compatible to the recent findings in the literature, I find that ICF sensitivity has indeed become weaker compared to earlier results, but among privately-owned European companies, the ICF sensitivity is still existent and economically significant - especially among durable goods manufacturing companies. The ICF sensitivity also seems to correlate with key measures of financial constraints and the sensitivity appears to be stronger in PIIGS countries.
Master's theses are stored at Learning Centre in Otaniemi.