Moral Hazard and Investment-Cash-Flow Sensitivity

Rui Li, Kai Li and Hengjie Ai
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Rui Li: University of Massachusetts Boston
Hengjie Ai: University of Minnesota

No 410, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a dynamic model of investment with moral hazard to provide a micro-foundation for financing constraints. In the model, standard investment-cash-flow sensitivity regressions will find a small coefficient on Tobin's Q and a large and significant coefficient on cash flow. Our calibration replicates the empirical fact that larger and more mature firms are less financially constrained but have higher investment-cash-flow sensitivity. Our theory therefore resolves the long-standing puzzle of the existence of the investment-cash-flow sensitivity and the seemingly weak relationship between investment-cash-flow sensitivity and the severity of financing constraints documented by Kaplan and Zingales (1997) and many others.

Date: 2017
New Economics Papers: this item is included in nep-sbm
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Journal Article: Moral Hazard and Investment-Cash-Flow Sensitivity (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:410

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