The Effect of Financial Constraint and Managerial Overconfidence on Investment-Cash Flow Sensitivity

Access to cash flow is primarily important for the substantiation of corporation investment plans but in various situations, the effect of cash flow on investment may change. Accordingly, the present study has dealt with the impact of financial constraints and managerial overconfidence on investment-cash flow sensitivity. The statistical sample consisted of 153 companies accepted in Tehran Stock Exchange from 2013 to 2021. The required data were collected from audited financial statements in Coda website. 8 hypotheses were proposed in this study and then tested using regression econometrics with fixed effects and Probit regression in EViews. Cash flow has a significantly positive effect on investment and overinvestment. Moreover, financial constraint increases positive investment and overinvestment-cash flow sensitivity although managerial overconfidence has no significant impact on investment and overinvestment sensitivity to cash flow. Yet, when the correlation between financial constraint and managerial overconfidence is considered, positive investment and overinvestment-cash flow sensitivity is reinforced which indicates the important role of financial constraint on adopting investment decisions. By supporting the theory of investment-cash flow sensitivity, findings of the study show that financial constraint, managerial overconfidence, and cash flow all have a vital effect on corporation investment decision making.