Investment-Cash Flow Sensitivity Around the Crisis: Are African Firms Different?

Purpose: This paper examines the contentious relationship between investment and cash flow using the 2008—09 credit supply shock as a form of quasi-natural experiment.

Methodology: Panel threshold models with unknown sample separation are estimated for a sample of publicly listed firms from nine African countries over the period 2003— 2012. Using this approach reduces subjective or ex-ante sample splitting bias that is not accounted for in the extant literature.

Findings: We show that investment-cash flow sensitivity is decreasing even during the Global Financial Crisis, and for firms more likely to be financially constrained. We conclude that the usefulness of investment-cash flow sensitivity as a proxy for financial constraints is diminishing over time, even after directly addressing biases from ex-ante subjective sample splitting and various forms of endogeneity.

Originality: We provide new empirical evidence from sharper tests of financial con- straints for understudied African firms, and highlight the need to re-look at the usefulness of investment-cash flow sensitivity as a proxy of financial constraints.