Firm size and investment-cash flow sensitivity: The developing country evidence

Literatures argue that investment behavior is presumably different between small and large firms. Small firms have less access to external capital markets and are expected to be more financially constrained. Large firms, on the other hand, are known to be fundamentally and financially strong. This paper seeks to examine the impact of similar factors on investment among companies in a developing country. The authors employed the top 20 and bottom 20 multi-sector performers listed in the FTSE 100-index of the Malaysian Bourse for this purpose. Research results demonstrate similarities with results from earlier researchers. The study confirms the presence of investment-cash flow significant relationship. Besides a positive relationship, investment is highly sensitive to cash flow among large size firms, as compared to small size firms. These firms are more dependent on their internal funds availability for investments and growth. Large size firms also possess the ability in adjusting or delaying their projects when experiencing financial constraints. Small size firms, in contrast, consistently execute costly investments, primarily for survival. This research framework makes a significant contribution that could be used as a platform for management, as well as, governments of developing countries to focus on their investment efforts for sustainability and growth. Additionally, it further engenders awareness and better understanding of their roles.