The fading of investment-cash flow sensitivity and global development

This study examines investment-cash flow (ICF) sensitivity across international markets and shows that the sensitivity has been stable in poor countries, but has experienced a sharp decline over time in firms located in rich countries. Our results suggest that the growing wealth of economies worldwide and relaxation of financial constraints at the firm level have led to the disappearance of ICF sensitivity in rich, highly developed countries but not in poor developing ones. We show that access to external finance, especially equity finance, is a key channel through which country-level development affects the sensitivity of investment to internal cash flow. Our evidence suggests that the amount of available economic resources and allocation efficiency are two necessary conditions that ensure the viability of the equity channel.