Investment behaviour and liquidity constraints - A sensitivity analysis

Several empirical papers find that firms a priori classified as liquidity constrained exhibit greater sensitivity of investment to cash flow than those classified as unconstrained. In this paper we analyse the robustness of these findings in different ways, We use three different methods calculating Tobins Q and four different variables for classification as well as different group sizes. For three classification variables measuring liquidity constraints, we find lower sensitivity of investment to cash flow for unconstrained classified firms. Using different group sizes leads to only minor differences in the results. Calculating Tobins Q as a ratio of two rates of return leads to less significant results than methods using stocks for calculating Q.