Abstract
We examine the role of a country‟s institutional framework for investment and financing activities. A country‟s financial structure, investor rights, and legal environment are important determinants of the relation between cash flow and firms‟ investment and financing behavior. Firms from countries with a strong institutional framework exhibit higher financing-cash flow sensitivities. These firms are more likely to substitute a cash flow shortfall with issuing equity. Conversely, investment-cash flow sensitivities are higher for firms in countries with a weaker institutional framework.
