Credit multiplier and the external financing – cash flow relationship

Credit multiplier and the external financing – cash flow relationship

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Rashid, A., Jabeen, N. Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms. Financ In).

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Although information asymmetry is expected to play a significant role in formulating the linkages between internal funds and external financing, it is not the whole story. As stated by Almeida & Campello (2010), financially constrained firms are more reliant on internally generated funds while making investment decisions. On the flip side, financially unconstrained firms are generally free to make decisions regarding investment. Said differently, investment is exogenous for unconstrained firms. Thus, Almeida and Campello stated that in case of financially constrained firms, the endogeneity of investment is the fundamental cause for the negative sensitivity of external funds to cash flows.