The sensitivity of Canadian corporate investment to liquidity

This study examines the investment behaviour of 201 Canadian firms over the 1987-94 period and confirms that liquidity is a significant determinant of Canadian corporate investment. Contrary to recent US evidence, the investment-liquidity sensitivity of financially constrained firms is not found to be significantly different from that of unconstrained firms. Surprisingly, partially constrained fins exhibit higher investment-liquidity sensitivity than both constrained and unconstrained firms. The difference from the US results is attributed to the industry structure and closely held nature of Canadian firms. Finally, this study, highlights the importance of sample size by demonstrating how sensitive the results can be to the behaviour of a small number of firms. This represents an important observation, since the conclusions of several previous studies are based on small sample results.