Question

Why is corporate investment sensitive to the availability of internal resources such as cash flow?

Answer 1

Sensitivity of corporate investment to the availability of internal resources such as cash flow:

Corporate managers to maximize the value of the company, are looking for investment projects with high profitability. Projects profitable, requires appropriate financing and cheap. Various methods of financing, including domestic financing, external financing, or a combination of the two methods. But because of the agency and information asymmetry and consequently more expensive financing from abroad, companies are more inclined to use resources within the company. A company that is more and more difficult access to external sources of capital market, the company's reliance on internal resources of the company is determined by the sensitivity of investment to cash flow. Since the cash flows to investors and creditors cash flows depend unit profit, units of profit on invested cash resources, in addition to earning extra cash, investors are looking for returns. The process of theoretical concepts of financial reporting, financial flexibility is called. Financial flexibility namely, the ability of business, based on effective measures to change the amount and timing of cash flows, so that the entity can react to unexpected events and opportunities. It is obvious that the majority of the entity's financial flexibility, the ability to be more responsive to unexpected opportunities. Financial flexibility is usually in the field of financial decisions. On theoretical grounds, such as the decisions related to cash management, savings, profit distribution, financing, investment and financial decisions as they could be expressed.

The effect of the contrast between investment and financing decisions co-financing is an important issue in literature. Choose how to finance the investment decisions because of tax issues, representation expenses, publication fees and stock information asymmetry influential.In perfect markets, the choice of financing options has no impact on investment decisions and firm value. In perfect markets, investment and financing decisions independent of each other. In other words, companies can always at a cost of external finance their capital expenditure to do. But if there is no market failure, is unrealistic. In the case of capital market imperfections, internal and external sources of funds cannot be fully replace each other. When access to external financing is difficult, companies from their operating cash flow for their investment.As a result, investors are sensitive to operating cash flow.. Most of the research on information asymmetry and capital market imperfections have shown that external financing market imperfections may be more expensive than domestic financing due to the higher cost of capital.The amount a firm reliance on domestic sources through "sensitivity of investment - cash flow," the company is determined.In other words, the sensitivity of cash flows - investors, the reaction of investors is the cash flow generated by the Company through regression coefficient of sensitivity provided by investment cash flow by controlling the growth opportunities by Tobin's Q, measured.