Impact of firm diversification and cash flow volatility on investment-cash flow sensitivity: Evidence from non-financial companies of Pakistan

Abstract

This study has been conducted to find out the impact of firm diversification and cash flow volatility on investment cash flow sensitivity, ICFS of non-financial 102 firms. Data has been analyzed for the period of 2011 to 2015. We have used panel data of Pakistani firms listed at Pakistan Stock Exchange to explain the relationship. Common, Fixed, Random Effect Model and Hausman regression Model has been applied as a research tool and the results have shown that diversified firms exhibit no cash flow sensitivity. Whereas, the cash flow volatility has negative and significant effect on ICFS. However, it was seen that low cash flow volatile firms hold more significance rather than high volatile firms. The results are consistent with Fazzari et al. (1988) results.