2016

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Browsing 2016 by Author "Rehan Ahmed"

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    Role of Cash Flow Sensitivity and Managerial Discretion in the Investment Decisions
    (UMT,Lahore, 2016-04) Rehan Ahmed
    This research aims to investigate how a firm’s decision in favor of, or against, financing new positive NPV projects, depends on the availability of internal cash flows and to what extent they are dependent on the discretion of managers making investment decision. For a given firm, cash flow shocks result in expectations formation about future cash flows. If a firm experiences a positive cash flow shock, it is more likely for the said firm to positively change its expectations about future cash flows. In case of a negative cash flow shock, the firm is likely to expect more negative cash flows in future. The availability of finance, literature tells us, is not merely a function of supply but rather it is the cost on which a firm is able to obtain financing. In case of firms working in Pakistan, a majority of firms should face, in this regard, a financial constraint weakening their ability to extend their operations or start new projects. This constraint may emerge from the fact that compared to developed economies such as United States, the market is highly characterized by information asymmetries. On the other hand, the agency theory states that agents often make those decisions that do not necessarily reflect the interests of the principals. Tthis should also be true for the investment decisions. This research aims to investigate on which of the above two factors does the investment decisions depend or whether both of these factors can be thought of as a collective force that determines where and when the investments are made.