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Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms

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  • C. Edward Fee
  • Charles J. Hadlock
  • Joshua R. Pierce
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    Abstract

    We find a significant positive relation between a firm's advertising spending in the United States and its contemporaneous foreign cash flow. This relation holds even after controlling for factors that should be related to the optimal level of domestic advertising, and it is stronger for subsets of firms that we expect to be relatively more financially constrained. Our evidence supports the hypothesis that there is a causal and economically substantial link between cash flow and investment spending, even for intangible investments such as advertising. Our evidence also suggests that firms have active internal capital markets in which capital is moved across geographic regions. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 22 (2009)
    Issue (Month): 6 (June)
    Pages: 2361-2392

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    Handle: RePEc:oup:rfinst:v:22:y:2009:i:6:p:2361-2392

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    Cited by:
    1. Fee, C. Edward & Hadlock, Charles J. & Pierce, Joshua R., 2012. "What happens in acquisitions?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(3), pages 584-597.
    2. Popov, Alexander, 2014. "Credit constraints and investment in human capital: Training evidence from transition economies," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 23(1), pages 76-100.
    3. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2012. "Do financing constraints matter for R&D?," European Economic Review, Elsevier, vol. 56(8), pages 1512-1529.
    4. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series, European Central Bank 1630, European Central Bank.
    5. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
    6. Chongyang Chen & Zhonglan Dai & Douglas Shackelford & Harold Zhang, 2011. "Does Financial Constraint Affect Shareholder Taxes and the Cost of Equity Capital?," NBER Working Papers 17169, National Bureau of Economic Research, Inc.
    7. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(3), pages 418-435, September.

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