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Organizational Capital and Investment-Cash Flow Sensitivity: The Effect of Management Quality Practices


  • Najah Attig,

  • Sean Cleary

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    • Najah Attig is the Canada Research Chair of Finance and an Associate Professor of Finance at the Sobey School of Business at Saint Mary's University in Halifax, Canada. Sean Cleary is the BMO Professor of Finance at Queen's Business School at Queen's University in Kingston, Ontario, Canada.

  • The authors acknowledge, with much appreciation, the comments and suggestions by Raghu Rau (Editor), Steven N. Kaplan, and Sandra Waddock. We also thank an anonymous referee, Sadok El Ghoul, Omrane Guedhami, Brian Meagher, Mohammad Rahaman, Ashraf Zaman, and participants at the Saint Mary's University Finance Seminars, Dalhousie University Mackay Finance Seminars, and the NFA 2011 meetings for their helpful comments and suggestions. Najah Attig is particularly grateful to Nicholas Bloom and John Van Reenen for granting the right to use “management quality” survey data and for providing valuable comments. The authors appreciate the generous financial support from Canada's Social Sciences and Humanities Research Council.


This paper examines the influence of organizational capital, as evident in management quality practices, on the response of firm investment to internal cash flows. We provide novel and strong evidence that investment sensitivity to internal cash flows decreases in the presence of superior management practices. We also find that superior management practices reduce the firm's financing frictions, evident in lower capital constraints. Our results are robust to numerous tests. Overall, our findings suggest that intangible organizational capital is important for investment decisions and that superior management practices contribute to value-maximizing behavior.