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Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets

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  • Demir, Firat

Abstract

Based on the Euler equation approach, the paper analyzes the impacts of availability of internal funds on fixed investment spending in the presence of multiple investment options. It is argued that after financial liberalization real sector firms face a portfolio allocation problem between fixed and financial investments. Therefore, depending on the respective rates of returns the availability of internal funds may be a necessary but not sufficient condition for financing real investment projects. The empirical results using firm level data for Mexico and Turkey confirm this hypothesis and suggest that profits from fixed and financial assets have differential effects on fixed investment spending.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3081.

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Date of creation: Jan 2007
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Handle: RePEc:pra:mprapa:3081

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Keywords: Private Investment; Financing Constraints; Cash Flow; Portfolio Choice;

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