This paper investigates the sources of the correlation between corporate cash flow and investment by undertaking an in-depth analysis of the 49 low-dividend firms identified by Fazzari, Hubbard, and Petersen (1988) as having an unusually high investment-cash flow sensitivity. We find that in only 15% of firm-years is there some question as to a firm's ability to access internal or external funds to increase investment. Strikingly, those firms that appear less financially constrained exhibit a significantly greater investment- cash flow sensitivity than firms that appear more financially constrained. We find this pattern for the entire sample period, for sub-periods, and for individual years. The results indicate that a higher sensitivity cannot be interpreted as evidence that a firm is more financially constrained. We discuss reasons and provide evidence why the opposite may be true. These findings challenge much of the existing evidence on the effects of financial constraints.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5267.
Length: Date of creation: Sep 1995 Date of revision: Publication status: published as quarterly journal of economics, feb.1997, 169-215. Handle: RePEc:nbr:nberwo:5267
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Myers, Stewart C., 1984.
"Capital structure puzzle,"
Working papers
1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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