Evidence on the investment-cash flow sensitivity for a panel of portuguese manufacturing firms

Abstract

In the last two decades, a renewed interest about the influence of financial factors on a firm’s capital investment decision emerged. In fact, theoretical developments that occurred in the field of information economics, which emphasised the existence of information problems in financial markets, allowed to rationalise a close relationship between financial factors and investment expenses of firms. This paper aims at contributing to the empirical literature on this subject, presenting the results of an empirical study undertaken for a panel of Portuguese manufacturing firms. The results obtained suggest that the impact of financial factors on investment decisions of firms is greater for those facing higher information problems in financial markets, such as: small, young and low retention firms.