Negative operating cash flows and investment inefficiency

Purpose The purpose of this paper is to identify whether negative operating cash flows are related to investment inefficiency, and specifically whether they are related to subsequent overinvestment and if this relationship is driven by agency problems within the firm. Design/methodology/approach The study conducts fixed effect regressions, testing the relationship between negative operating cash flows and the firm's subsequent investment inefficiency. The relationship is further examined for all firms based on size, corporate governance and cash holdings - all of which are related to agency problems. Findings The proportion of firms reporting negative operating cash flows has been increasing over time and is positively related to subsequent investment inefficiency. This increase is explained not only by the rise in investment of intangible assets. The positive relationship is not explained by the firm size or corporate governance, but is related to cash holdings. These results are consistent across four different measures of firm investment. Practical implications The percentage of publicly traded firms with negative operating cash flows has never been higher. This paper is one of the first to identify factors that may be contributing to this rise. Originality/value This study extends prior findings by identifying previously unexplored factors related to the rise in firms with negative operating cash flows. The rise in investment of intangible assets does not explain the increase alone. High cash holdings also influence the rise in negative operating cash flows.