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Internal capital markets and investment: do the cash flow constraints really bind?

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  • Calvin Schnure
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    Abstract

    Lamont (1997) claims to find evidence of credit market imperfections that distort financing and investment decisions of a sample of oil-dependent firms, as investment by non-oil units fell when oil cash flow dropped. However, a simple test reveals that few of these firms behaved in a fashion consistent with binding cash flow constraints. In addition, most were cash rich. The data provide strong evidence against the hypothesis that investment decisions by non-oil units were significantly affected by oil cash flow, or that credit market imperfections are an important factor for this set of firms.

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    File URL: http://www.federalreserve.gov/pubs/feds/1997/199739/199739abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/1997/199739/199739pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1997-39.

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    Date of creation: 1997
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    Handle: RePEc:fip:fedgfe:1997-39

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    Related research

    Keywords: Cash flow ; Liquidity (Economics) ; Investments;

    References

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    1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    3. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. 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.
    5. 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.
    6. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Allard Bruinshoofd, 2003. "Corporate Investment and Financing Constraints: Connections with Cash management," DNB Staff Reports (discontinued) 110, Netherlands Central Bank.
    2. Goldman, Eitan, 2004. "The impact of stock market information production on internal resource allocation," Journal of Financial Economics, Elsevier, vol. 71(1), pages 143-167, January.
    3. Stoneman, Paul, 2001. "Heterogeneity and Change in European Financial Environments," EIFC - Technology and Finance Working Papers 7, United Nations University, Institute for New Technologies.

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