Monetary Policy, Cash Flow and Corporate Investment: Evidence from Pakistan

The current research aims to study the combined effect of micro-economic factor internal cash flow (CF) andmacro-economic factor monetary policy on investment behavior of non-financial firms listed on Pakistan StockExchange over the period of 2010-2020. Dynamic panel model is used in the study for empirical testing of thehypotheses. One-step and two step system with Quintile regression GMM estimation techniques were applied forempirically testing of hypothesis. Data were collected from secondary sources through company’s annualpublished and audited financial statements and from company’s website of 265 non-financial firms Pakistan. Theresults identify cash flow has an inverse relationship with investment of firms in one step system GMM i.e. simpleregression. However, cash flow tends to increase the level of investment in all other regression models. Thecontractionary monetary policy would likely to decrease the investment. Cash flow decreases the investment offirms in lower quintile of firms as compared to high quintiles. Monetary policy decrease the investment in lowerquintiles but this relationship tends to be positive when firm move towards high quintiles of firm investment. Themagnitude of cash flow and monetary policy varies in all quintiles of firm investment. Overall, the results areinconclusive across all the level. This study suggested that financial managers should manage internal cash flowsto increase cash reserves in order to meet capital expenditures and project’s needs of non-financial firms inPakistan.