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

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  • Yuzo Honda

    (School of Economics, Osaka University)

  • Kazuyuki Suzuki

    (Meiji University)

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    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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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0624.pdf
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    Bibliographic Info

    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
    Date of revision:
    Handle: RePEc:osk:wpaper:0624

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Related research

    Keywords: Tobinfs Q; Investment Equation; Cash Flow; Financing Constraint; Japanese Unlisted Firms;

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    1. 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.
    2. Xiaoqiang Hu & Fabio Schiantarelli, 1998. "Investment And Capital Market Imperfections: A Switching Regression Approach Using U.S. Firm Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 466-479, August.
    3. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
    4. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Hoshi, Takeo & Kashyap, Anil K., 1990. "Evidence on q and investment for Japanese firms," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 371-400, December.
    6. Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
    7. Christopher Polk & Paola Sapienza, 2009. "The Stock Market and Corporate Investment: A Test of Catering Theory," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 187-217, January.
    8. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, February.
    9. 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.
    10. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    11. Fumio Hayashi & Tohru Inoue, 1990. "The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," NBER Working Papers 3326, National Bureau of Economic Research, Inc.
    12. Yuzo Honda & Kazuyuki Suzuki, 2000. "Estimation of the Investment Thresholds of Large Japanese Manufacturers," The Japanese Economic Review, Japanese Economic Association, vol. 51(4), pages 473-491, December.
    13. Fumio Hayashi, 1997. "The Main Bank System and Corporate Investment: An Empirical Reassessment," NBER Working Papers 6172, National Bureau of Economic Research, Inc.
    14. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
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