CORPORATE LIQUIDITY, CASH FLOW SENSITIVITY, AND INVESTMENT DECISION
Ratified on 18 Januari 2012
Prof. Marwan Asri, MBA, Ph.D
Modigliani and Miller (1958), in a perfect market conditions there is no relationship between investment decisions and financing decisions. Although the assumption of perfect markets is eliminated, the separation between investment decisions and financing decisions still occur even if there is a slight modification that the manager must use the cost of capital as the weighted average discount rate (Hidayat, 2009). Even when the capital structure has become irrelevant, either because of taxes or because of other factors, still did not occur a direct relationship between investment and financing. Things that should be done by a manager is that the investment program is decided first and then decide its funding so that investment decisions are actually intended to make the AKS imalkan value of the company, therefore, investment decisions should be independent of funding decisions. Some empirical evidence suggests an association between investment decisions and financing decisions, in other words there is a correlation between the level of corporate liquidity and level of investment in many companies. Several previous studies Fazzari, Hubbard, and Petersen (1988); Vogt (1994); Kaplan and Zingales (1997); Cleary (1999); Moyen (2004); Almeida, et al (2004), and Hidayat (2009) show that there is a positive relationship between liquidity and investments decision in companies in the United States. The same was found by Hoshi, et al (1991) in Japan, Chirinko and Schaller (1996); Chirinko and Kalckreuth (2002); Bruinshoofd (2003); Mizen and Varmeulen (2005) and Prasetyantoko (2007). Empirical evidence in Indonesia is shown by Agung (2000), Kristianti (2003), Hermeindito (2004), and Hidayat (2009) who finds that liquidity is positively related to investment decisions. Instead Prasetyantoko (2007) show that liquidity is negatively related to investment decisions. In his research, Prasetyantoko (2007) use cash flow as a proxy for liquidity, while investment is measured by capital expenditure is deflated by the capital stock. Investment cash flow sensitivity is defined as the level of the company's financial constraints. Cash flow sensitivity of investment reflects higher cost of external financing relative to internal financing due to asymmetric information or agency problem. Other studies show a relationship between cash flow sensitivity and financing constraints are sensitive to how the company is classified into two groups who are financially constrained and non financially constrained. Fazzari et al (1988) stated that in addition to the opportunity to grow, investment companies as well affect the company's cash flow and more will further reduce the company's dividend payment. Hovakimian and Hovakimian (2005) concluded that there is a positive relationship between internal funds and investment decisions due to the liquidity constraints faced by firms as a result of the gap between the cost of external financing and internal financing. The results Alti (2003) showed that the relationship between investment and cash flow is stronger in companies that are in growth stage, which is likely to experience financial difficulties because the companies have to make adjustments between the investments made with generated cash flow. Moreoever it reflects the company's growth opportunities. Based on previous studies, researchers can estimate the life cycle of the company's cash flow sensitivity of investment and use it to classify firms into groups with high cash flow sensitivity, low, and negative. Hovakimian (2009) explains that firms with positive cash flow sensitivity will face higher cost of external financing than the companies who have insensitive cash flow. Companies with positive cash flow...
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