Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms

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Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms

Author Info

Yuzo Honda (School of Economics, Osaka University)
Kazuyuki Suzuki (Meiji University)

Abstract

The literature maintains the statistical significance of cash flow in the investment equation. One criticism against the financing constraint interpretation of cash flow is that cash flow may be picking up information on the future profitability of a firm which Tobinfs Q fails to capture. We confine ourselves to the investment behavior of unlisted automobile parts suppliers, and use the sales of large automobile makers as an exogenous instrument. Despite the various criticisms against the financing constraint interpretation of cash flow, our statistical evidence does not disagree with the hypothesis.

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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 06-24.

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Length: 39 pages
Date of creation: Aug 2006
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Handle: RePEc:osk:wpaper:0624

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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

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-08-26 (All new papers)
NEP-FIN-2006-08-26 (Finance)
NEP-FMK-2006-08-26 (Financial Markets)
NEP-MAC-2006-08-26 (Macroeconomics)
NEP-SEA-2006-08-26 (South East Asia)

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