| This paper investigates the investment policy of firms. More specifically, it examines whether financially constrained firms have investment policies that are more sensitive to their cashflow fluctuations than less constrained firms. In addition, I test whether this cashflow sensitivity to financial constraint is monotonically decreasing as firms become less financially constrained. I obtain three results. First, consistent with Fazzari, Hubbard, and Petersen [1988], firms that are more financially constrained generally exhibit greater investment-cashflow sensitivities. However, this result is not robust to all definitions of financial constraint and cashflow. In some instances, firms that are more financially constrained have lower cashflow sensitivities. Second, consistent with Kaplan and Zingales [1997], I do not find that firms' cashflow sensitivities decrease monotonically as they become less financially constrained. Third, financially distressed firms adopt investment policies that are negatively related to their cashflow fluctuations, thus bidding their way out of economic hardship. Further analysis on financially distressed firms shows that the gamble for resurrection phenomenon is more evident in firms facing more economic distress. Managers in financially and economically distressed firms invest more when their net losses get bigger. |