Do Investment-Cash Flow Sensitivities of Listed Firms Reflect Growth Types Rather than Financial Constraints?

Many believe that market imperfections such as information asymmetries give rise to financial constraints because external finance is more costly than internal funds; consequently, the smaller the internal-generated cash flow, the greater the external financing constraints on investments. Researchers have often used investment-cash flow sensitivities (ICFS) to capture this relationship. Later studies, however, have cast doubt on the validity of using ICFS to measure the degree of financial constraints. Unlike many studies, this project is not to determine what measures financial constraints. This project aims to show that ICFS of listed firms which have access to external capital markets reflects growth types rather than financial constraints. We will measure firm growth type using asymmetric information type (AI) with a growth type spectrum where a higher AI means a higher growth type. We expect to show that AI explains ICFS even controlling for other popularly measured financial constraints.