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Investment, cash flow, and uncertainty: evidence for the Netherlands

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  • Sterken, Elmer
  • Lensink, Robert
  • Bo, Hong

    (Groningen University)

Abstract

Abstract We contribute to the debate on the interpretation of investment-cash flow sensitivities by including uncertainty measures in both a simple theoretical investment model and an empirical illustration for Dutch firm-level data. Using a slightly modified version of the Kaplan-Zingales (1997) model we show that it is likely that firms facing high uncertainty rely more on cash flow. Next we illustrate this result using an investment panel data model of Dutch listed firms. Using a threshold estimator we determine the critical level of stock price, sales, and employment uncertainty. Next we apply a GMM-estimator to correct for the endogeneity of the regressors. The empirical results confirm the notion that higher uncertainty intensifies the use of cash flow.

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File URL: http://irs.ub.rug.nl/ppn/241235200
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Bibliographic Info

Paper provided by University of Groningen, CCSO Centre for Economic Research in its series CCSO Working Papers with number 200114.

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Date of creation: 2001
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Handle: RePEc:dgr:rugccs:200114

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Web page: http://ccso.eldoc.ub.rug.nl/
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  1. Hamermesh, Daniel S & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  2. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
  3. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  4. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities Are Useful: A Comment On Kaplan And Zingales," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 695-705, May.
  5. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  6. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
  7. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
  8. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  9. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc.
  10. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  11. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
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Cited by:
  1. Calcagnini, Giorgio & Saltari, Enrico, 2003. "Labour and Financial Market Determinants of Investment Decisions in Europe," EIFC - Technology and Finance Working Papers 26, United Nations University, Institute for New Technologies.
  2. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
  3. Giorgio Calcagnini & Germana Giombini & Enrico Saltari, 2009. "Firms’ Investment in the Presence of Labor and Financial Market Imperfections," Working Papers 0901, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2009.
  4. Calcagnini, Giorgio & Giombini, Germana & Saltari, Enrico, 2009. "Financial and labor market imperfections and investment," Economics Letters, Elsevier, vol. 102(1), pages 22-26, January.
  5. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
  6. Audretsch, David B. & Weigand, Jurgen, 2005. "Do knowledge conditions make a difference?: Investment, finance and ownership in German industries," Research Policy, Elsevier, vol. 34(5), pages 595-613, June.

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