A1869
Title: Is monotonicity of the investment-cash flow sensitivity satisfied? Evidence on a joint hypothesis
Authors: Leone Leonida - King's College London (United Kingdom) [presenting]
Abstract: The considered question is whether the monotonicity of the investment-cash flow sensitivity is empirically satisfied. We propose an analysis of the so-called monotonicity condition that sidesteps the major uncertainties that must be faced when it comes to sorting firms according to the degree of financing constraints. We show that, because the true degree of financing constraints is unobservable, imposing the sorting scheme at the outset to the sample puts at risk the conclusion about whether the condition holds. This leads to considering this uncertainty and testing a joint null hypothesis. We show that, if the sample is appropriately sorted and monotonicity holds, then the point of sample separation does not affect the monotonic relationship between the observable average sensitivities of any two complementary classes of observations. We test this property by building on the most common metrics of the degree of financing constraints. We show that (1) there exists a monotonic relation among the sorting metrics; (2) the monotonicity condition is not empirically met as there exists a non-monotonic relation between ICFS and the true degree of financing constraints; (3) the ICFS is inverse basin-shaped and, finally, (5) this basin shape encompasses all the shapes documented by previous studies.
