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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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References

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Cited by:
  1. 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.
  2. Caggese, Andrea, 2007. "Testing financing constraints on firm investment using variable capital," Journal of Financial Economics, Elsevier, vol. 86(3), pages 683-723, December.
  3. Andrea Caggese, 2005. "Financing Imperfections and the Investments Decisions of Privately Owned Firms," Working Papers 265, Barcelona Graduate School of Economics.
  4. Vadim Khramov, 2012. "Asymmetric Effects of the Financial Crisis: Collateral-Based Investment-Cash Flow Sensitivity Analysis," IMF Working Papers 12/97, International Monetary Fund.

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