Investment-cash flow sensitivity
CORPORATE LIQUIDITY, CASH FLOW SENSITIVITY, AND INVESTMENT DECISION
Written by:
Destria Kurnianti
10/309731/PEK/15164
Ratified on 18 Januari 2012
Supervisor
Prof. Marwan Asri, MBA, Ph.D
INTRODUCTION
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
Written by:
Destria Kurnianti
10/309731/PEK/15164
Ratified on 18 Januari 2012
Supervisor
Prof. Marwan Asri, MBA, Ph.D
INTRODUCTION
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
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