We thank an anonymous referee, Robert Faff, Olga Dodd, Graeme Guthrie, Martin Lally and Stefanie Schurer for their comments. We also thank seminar participants at the 2012 Victoria University of Wellington Finance Workshop, the 2012 Auckland Finance Meeting, the 2013 New Zealand Finance Colloquium and the 2013 Accounting and Finance Conference. We thank Robert Kieschnick, who provided comments while a Stephen Turnovsky Visiting Scholar at the School of Economics and Finance at Victoria University of Wellington. All remaining errors are our own.
Is the relationship between investment and conditional cash flow volatility ambiguous, asymmetric or both?
Article first published online: 1 AUG 2013
© 2013 AFAANZ
Accounting & Finance
Volume 53, Issue 4, pages 913–947, December 2013
How to Cite
O'Connor Keefe, M., Tate, J. (2013), Is the relationship between investment and conditional cash flow volatility ambiguous, asymmetric or both?. Accounting & Finance, 53: 913–947. doi: 10.1111/acfi.12034
*Correction added on 8 October 2013 after first publication online on 1 August 2013: The hypotheses have now been renumbered.
- Issue published online: 26 NOV 2013
- Article first published online: 1 AUG 2013
- Manuscript Accepted: 5 JUN 2013
- Manuscript Received: 31 OCT 2012
- Cash flow volatility;
- Financial flexibility;
- Real options and financial constraints
We investigate the effect of cash flow volatility on investment. Our evidence suggests that financially constrained firms decrease investment (i) when experiencing persistently high volatility; (ii) when experiencing both high volatility and negative cash flow growth realisations; and (iii) when holding low cash levels and experiencing both high volatility and a negative cash flow growth realisations. In financially unconstrained firms, the above effects are either not found or are of relatively low economic importance. Overall, our findings lend support to the financial flexibility literature and tend to contradict predictions of the real options literature.