Sample separation and the sensitivity of investment to cash
flow:
on the monotonicity condition
Alfonsina Iona
School of Economics and Finance Queen Mary University of London
Leone Leonida King’s Business School King’s College London
Abstract
This paper studies whether the monotonicity condition of the investment-cash flow sensitivity is satisfied empirically. We show that if this condition holds, then the point of sample separation does not affect the monotonic relationship between the sensitivities of any two complementary classes of observations. Our test, based upon observable averages of the investment-cash flow sensitivity, rejects the monotonicity condition for any common metric of financing constraints we use. The testing procedure we propose reconciles the conflicting findings of the literature about the shape of the investment-cash flow sensitivity.
CFMS Statistics
The 12th International Conference of the ERCIM WG on Computational and Methodological Statistics (CMStatistics 2019), the Senate House, University of London, 14-16 December 2019.
