Institutional characteristics, investment sensitivity to cash flow and Tobin's q: Evidence from the Middle East and North Africa region

We examine the sensitivity of corporate investment to stock-market valuations (measured by Tobin's q) and internal funds (measured by cash flow) in a setting that captures the unique country institutional characteristics of the Middle East and North Africa region. We report a higher sensitivity of investments to cash flow than Tobin's q. However, both sensitivities are unaffected by the country institutional characteristics. By examining the sensitivity of investments to cash flow and Tobin's q before and after the 2008 global financial crisis, we document that the investment-cash flow relation has weakened over time, while the investment-Tobin's q relation has significantly strengthened. Finally, after dividing our country sample into resource-rich and resource-poor countries, the importance of cash flow over Tobin's q in the determination of corporate investment levels is asserted and the role of financial markets is found to be restricted to resource-rich countries only.