In the middle of perfect capital market, the decision on a company’s investment ought not to be altered by the firm’s financing positions. The imperfection on capital market nevertheless, brings in a barrier the costs of external cash flow and the internal funds. Companies that are facing greater levels of imperfection in information exhibits wider barriers hence they possess more sensitive investment that affect decisions of investment and financing. This study explores evidence showing that the investments firms that are financially constrained are very sensitive to the amount of internal funds that the firm can access. Referring to Some recent studies, there have been other evidences which indicate that the estimated sensitivity on cash flow has reduced in the 30 years between 1970 and 2000. This decrease in the cash- flow sensitivity indicates the possibility of the intervention between investment market imperfections for this two decades’ period.
In this study, we begin by verifying the outcome that the sensitivity of the cash flow has been declining through the years. The next step involves the process of exploring the causes of the decline. This verification takes place by evaluating a number of factors associated with the capital market imperfections, including the aggregate measure of fund flows, the institutional ownership, corporate governance and the analyst’s account of the firm’s legacy. ...Show more