Macroeconomic conditions and investment–cash flow sensitivity: Evidence from Saudi Arabia

The purpose of this paper is to examine whether the investment–cash flow (ICF) sensitivities vary with macroeconomic conditions. A fixed-effect panel technique with OLS regression is used to investigate the impact of macroeconomic factors on the ICF sensitivity applying data from a sample of 74 non-financial firms listed on the Saudi stock market over the period 2004–2018. The results show that the ICF sensitivity is positive, and is a lot larger for more constrained firms. Compared to developed markets, the results show higher ICF sensitivity in Kingdom of Saudi Arabia (KSA). Moreover, the results reveal that business environment of KSA has a considerable influence on the sensitivity of investment to internal funds. The evidence also shows that better macroeconomic conditions relax financial constraints faced by firms, and thereby reduce the sensitivity of investment to internal financing. Expansionary monetary policy, financial development and liquidity abundance reduce the dependence of firms on their internally generated funds when undertaking new investment projects. Finally, the results show that investment expenditures are more sensitive to internal cash flow during the crisis period, supporting our conjecture that constrained access to capital markets is more likely to be detected during times of liquidity crises.