Analyzing firm-varying investment-cash flow sensitivities and cash-cash flow sensitivities: A Bayesian approach

Abstract

We employ a Bayesian estimator to construct firm-varying investment–cash flow sensitivities (ICFS) for a sample of 90 Spanish listed firms over a 10-year period (1999-2008). We then analyze which variables are associated with the firm-level ICFS estimates. The results indicate that firms with high ICFS are capital-intensive firms with high growth rates that have exhausted much of their debt capacity. Furthermore, high-ICFS firms have lower liquidity, lower profitability and lower stock market valuation than their counterparts. These results provide evidence that high-ICFS firms have higher external financing needs while faced with fewer available external financing sources. Our analysis suggests that, at least for Spanish listed firms over the observed sample period, the ICFS is an adequate proxy for gauging a firm’s exposure to financing constraints. A similar exercise on firm-varying cash–cash flow sensitivities (CCFS) suggests no relation between the firm’s CCFS and exposure to financing constraints.