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Financial Market Imperfection, Overinvestment,and Speculative Precaution Author info | Abstract | Publisher info | Download info | Related research | Statistics Christian Calmès
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The author uses panel data to assess the sensitivity of investment to cash flow in non-financial firms, taking into account the role their financial health plays in investment decisions. Firms are categorized using a method called the Z-score, a contemporaneous indicator of financial stress that is inversely related to firms’ probability of financial failure. Based on this method, empirical evidence suggests that firms that have the greatest sensitivity of investment to cash flow display the lowest average Z-score. The author also shows that, in this class of firms, investment seems to be partly driven by excessive conservatism, or precaution.
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Paper provided by Bank of Canada in its series Working Papers with number
04-27.
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Length: 38 pages
Date of creation: 2004Date of revision:
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Keywords: Business fluctuations and cycles Find related papers by JEL classification: D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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