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Internal Finance and Firm Investment

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Author Info
R. Glenn Hubbard
Anil K Kashyap
Toni M. Whited

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Abstract

We examine the neoclassical investment model using a panel of U.S. manufacturing firms. The standard model with no financing constraints cannot be rejected for firms with high (pre-sample) dividend payouts. However, it is decisively rejected for firms with low (pre-sample) payouts (firms we expect to face financing constraints). Hem, investment is sensitive to both firm cash flow and macroeconomic credit conditions, holding constant investment opportunities. Sample splits based on firm size or maturity do not produce such distinctions. The latter comparison identifies firms where "free-cash-flow" problems might be expected to produce correlations between investment and cash flow.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4392.

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Date of creation: Sep 1995
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Publication status: published as Journal of Money, Credit and Banking, vol. 27, no. 3, pp. 683-701, August 1995.
Handle: RePEc:nbr:nberwo:4392

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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This page was last updated on 2008-7-24.

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