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School Research Seminar - To what extent are savings–cash flow sensitivities informative to test for capital market imperfections?

13 January 2016

Time: 1:00 - 2:00pm
Venue: FB 4.04/4.08 (Lunch from 12:30pm in the kitchen)

Speaker name & affiliation

Dr Serafeim Tsoukas, Adam Smith Business School, University of Glasgow

Seminar title

To what extent are savings–cash flow sensitivities informative to test for capital market imperfections?

Abstract

Savings–cash flow sensitivities have been proposed as a useful indicator for capital market imperfections by Almeida et al. (2004). Yet in subsequent work, Riddick and Whited (2009) have questioned their ability to discriminate un-ambiguously between financially constrained and unconstrained firms. We construct a simple model with lumpy investment and test a key prediction, namely, that under costly external finance, savings–cash flow sensitivities will vary significantly by investment regime. We confirm the validity of the model’s prediction and conclude that, in the presence of investment lumpiness, savings–cash flow sensitivities are a useful indicator of capital market imperfections.

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