Work

Conditional Investment-cash Flow Sensitivities and Financing Constraints

Year: 2013

Type: article

Abstract: We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external …nance. We present a benchmark model in which this conditional investment-cash flow sensitivity increases monotonically with the cost premium for external …- finance, for …firms in a fi…nancially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate invest- ment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the …first order conditions of our model, and show that this can be estimated directly.

Source: Journal of the European Economic Association

DOI: 10.1111/j.1542-4774.2012.01102.x

Authors: Stephen R. Bond, Måns Söderbom

Institutions: Institute for Fiscal Studies, University of Oxford, University of Gothenburg

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

Funder: Economic and Social Research Council

Awards: Business, taxation and welfare, G841499813