Cash Flow and Investment Decision: An Application on the Romanian Agriculture Sector

This paper tests the relationship between cash flow and the investment decision of firms from the Romanian agriculture sector. Although the role of cash flow in influencing the investment decision is explained by the financial frictions theory, the investment – cash flow nexus is controversial in empirical investigations. However, only few studies address the bidirectional relationship between the investment decision and the cash flow level. Using a large data set of 739 firms and a panel VAR approach for the period 2006 to 2014, we report a bidirectional causality between investment and cash flow. We find that firm's cash flow positively influences the level of investment in the next period, and we show therefore that the access to liquidity is important for the investment decision. At the same time, investment in fixed assets enhances the cash flow level only for the subsequent period, but it does not generate a series of cash flows as expected. The results are less conclusive if we use investment dynamics instead of investment level in our empirical analysis.