| Summary: | The objective of this article is to analyse the relationship pattern of cash flow-investment
among low and high debt firms. To investigate the issue, we employed Hansen’s (1999)
threshold method of non-dynamic panel data. In this article, the firm debt ratio was used as
threshold variable. A balanced panel data of companies listed on Bursa Malaysia,
comprising of 234 companies for a period from 2004 to 2010, was utilized in this study. The
results showed that debt ratio has a significant role at explaining the cash flow-investment
relationship among firms. In particular, the results showed that low debt firms exhibit
significant support to the financial constraints hypothesis, while high debt firms demonstrate
support to the free-cash flow hypothesis. This finding explains why the cash flow-investment
relationship of certain firms is negative, while other firms are positive. It also signifies the
inability of constrained firms to access to external financing; thus, leading the firms to
significantly rely on their internal financings.
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