Investment -Cash Flow Sensitivity and Companies’ Financial Conditions

Abstract

This study investigates the impact of companies’ financial conditions on the investment and internal capital. It is shown that when the company in a healthy condition, the investment cash flow sensitivity (ICFS) is significantly positive. The intensity of ICFS decreases when the company in the distressed or turnaround conditions. The ICFS of the company in a distressed condition shows a downward trend. According to the operating cash flow indicators, ICFS of the company in a turnaround condition also declines. The companies in a distressed condition may be in a turnaround condition while the companies take cautious investments. Considering the financial cyclical continuity, the sensitivity of the companies in a distressed condition shows a downward trend. The change in investment is not as high as it was in a healthy period because of the severe financial situation that forced a company to cut back on investment. The results suggest that to avoid the financial difficulties of companies arisen again, companies should tend to make more conservative investments in the turnaround period.