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Investment-cash flow sensitivity and the Bankruptcy Reform Act of 1978

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  • Alanis, Emmanuel
  • Quijano, Margot

Abstract

We exploit a change in bankruptcy law in 1978 in the U.S. as an exogenous shock that increased the cost of external funds for public companies. In a quasi-natural experiment setting, we investigate the impact of an increased cost of debt on the investment-cash flow sensitivity of firms. Our results show that the sensitivity of investment to cash flow increased by one third after 1978, and for a sample of firms likely to be more financially constrained the effect was as high as 80%. Our findings suggest the market value of a dollar in cash holdings increased by 12 cents after the change in law, with a larger effect for financially constrained firms.

Suggested Citation

  • Alanis, Emmanuel & Quijano, Margot, 2019. "Investment-cash flow sensitivity and the Bankruptcy Reform Act of 1978," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 746-756.
    • Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:746-756
    DOI: 10.1016/j.najef.2018.08.004
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    More about this item

    Keywords

    Corporate investment; Cash flow sensitivity; Bankruptcy;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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