The impact of firm size and internal funding on investment : evidence from Jordanian firms

Abstract EN

The main objective of this study is to examine the impact of size on the sensitivity of the relationship between internally generated cash flow and the levels of investment made by 57 industrial and service firms listed on tho Amman Financial Market during the period 1994-1997.

Based on theoretical justifications, our expectation was that due to the costs involved in, and the difficulty of obtaining external financing, small firms would rely to a larger extent on their internally generated cash flow than do large firms.

Thus, small firms were hypothesized to have higher cash flow-investment sensitivity than do large firms.

To examine the main hypothesis, firms were classified into two groups: small and large based on market capitalization.

using multiple regression analysis, the study found that internally generated cash flow contributes significantly to explaining variation in the firms' levels of investments for both group*.

These results might suggest that the availability of and access to external sources of funds represent a constraint for Jordanian industrial and service firms regardless of their size A policy implication of this paper is that there is a need 10 improve the long-term external sources of funds (e g the bond market) available to Jordanian firms.