Business group affiliation and financial constraints: investment-cash flow sensitivity of Turkish business groups

In the imperfect capital markets, the cost of external funds is greater than the cost of internal funds because of asymmetric information problems. Therefore, in these markets investment behavior largely depends on the ability of the firms’ internal funds generation. This excess cost and unavailability of external funds indicate financial constraints. Investments of the firms with financial constraints depend on availability of internal funds. In this context, in the literature the investment-cash flow sensitivity of a company also signalize the degree of the company's financial constraints. In this paper, we examine investment-cash flow sensitivity of the Borsa Istanbul manufacturing firms by considering affiliation with business groups. We divide our sample into four subsamples. We find insignificant investment-cash flow relationship for the firms affiliated with a major business groups and firms which have more than %15 foreign shareholders. On the other hand we find strong investment-cash flow sensitivity for the small business groups affiliated firms and non-affiliated independent firms.