Reappearing Investment-Cash Flow Sensitivities

According to previous research the investment-cash flow sensitivity has fallen over time to levels approaching zero in the 2000s, prompting some researchers to argue that the sensitivity cannot be a reasonable measure of financing constraints. We show that differences in sensitivities reappear if one sorts firm according to firms’ need for funding (investment rates) and the cost of external funding (leverage ratios). High capex-high leverage firms consistently have higher sensitivities, even throughout the 2000s.