Effects of Cash Flow Volatility on Investment with Restricted Financing Sources

Abstract

Change in operating cash flows along with uncertainty about rate of the change in future cause variation in firm’s investment. This study aims to examine the effects of cash flow volatility on firm’s investment, regarding restriction in financing sources. To test the hypotheses, data from a sample of 129 firms listed in the Tehran Stock Exchange in the years 2006 to 2013 were collected, using GLS method of regression estimation. Findings showed that in the firms with restricted sources of financing and the growth rate of operating cash flow, changing from positive to negative rates, or vice versa, the operating cash flow volatility decreases firm’s investment. Also, it was found that the negative growth rates have greater effects on firm's investment, than the positive growth rates. However, in the firms with no restriction in financing, there is no relationship between operating cash flow volatility and firms’ investment.

Keywords

• operating cash flow volatility
• investment sensitivity
• financial constrained firm