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Do adjustment costs explain investment-cash flow insensitivity?

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  • Pratap, Sangeeta

Abstract

In this paper, I explain two “puzzles” that have been observed in firm level data. First, firms that display a high sensitivity of investment to cash flow (commonly believed to be an indicator of liquidity constraints) usually have large unutilized lines of credit which, presumably, could be used to overcome the shortage of funds. Second, firms that are perceived to be extremely liquidity constrained actually show very little sensitivity of investment to cash flow.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 27 (2003)
Issue (Month): 11 ()
Pages: 1993-2006

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Handle: RePEc:eee:dyncon:v:27:y:2003:i:11:p:1993-2006

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Liquidity constraints; Adjustment costs; Tobin's q;

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Cited by:
  1. Andrea Caggese, 2003. "Testing financing constraints on firm investment using variable capital," Economics Working Papers 1009, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2006.
  2. Andrea Caggese, 2005. "Financing Imperfections and the Investments Decisions of Privately Owned Firms," Working Papers 265, Barcelona Graduate School of Economics.
  3. Vadim Khramov, 2012. "Asymmetric Effects of the Financial Crisis," IMF Working Papers 12/97, International Monetary Fund.
  4. Junlu Ma & Zeguang Li & Qunyong Wang, 2009. "Financial constraints, agency cost and firm’s investment behavior: Evidence from listed companies of China," Frontiers of Economics in China, Springer, vol. 4(3), pages 384-405, September.

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