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Conditional Investment–Cash Flow Sensitivities And Financing Constraints

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  • Stephen R. Bond
  • Måns Söderbom

Abstract

We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external …nance. We present a benchmark model in which this conditional investment-cash flow sensitivity increases monotonically with the cost premium for external …- finance, for …firms in a fi…nancially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate invest- ment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the …first order conditions of our model, and show that this can be estimated directly.
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Suggested Citation

  • Stephen R. Bond & Måns Söderbom, 2013. "Conditional Investment–Cash Flow Sensitivities And Financing Constraints," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 112-136, February.
  • Handle: RePEc:bla:jeurec:v:11:y:2013:i:1:p:112-136
    DOI: j.1542-4774.2012.01102.x
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    File URL: http://hdl.handle.net/10.1111/j.1542-4774.2012.01102.x
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    References listed on IDEAS

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    1. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities are Useful: A Comment on Kaplan and Zingales," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 695-705.
    2. Caballero, R.J., 1996. "Fixed Costs: The Demise of Marginal q," Working papers 96-14, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Nathalie Moyen, 2004. "Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms," Journal of Finance, American Finance Association, vol. 59(5), pages 2061-2092, October.
    4. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
    5. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    6. 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.
    7. 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.
    8. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    9. Stephen Bond, 2000. "Noisy Share Prices and the Q Model of Investment," Econometric Society World Congress 2000 Contributed Papers 1320, Econometric Society.
    10. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
    11. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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    Citations

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    Cited by:

    1. Steinbuks, J., 2008. "Financial constraints and firms' investment: results of a natural experiment measuring firm response to power interruption," Cambridge Working Papers in Economics 0844, Faculty of Economics, University of Cambridge.
    2. Andrea Mercatanti & Taneli Mäkinen & Andrea Silvestrini, 2017. "Investment decisions by European firms and financing constraints," Temi di discussione (Economic working papers) 1148, Bank of Italy, Economic Research and International Relations Area.
    3. Carsten Sprenger & Olga Lazareva, 2017. "Corporate Governance and Investment: Evidence from Russian Unlisted Firms," HSE Working papers WP BRP 160/EC/2017, National Research University Higher School of Economics.
    4. Lawless, Martina & O’Toole, Conor & Slaymaker, Rachel, 2018. "Estimating an SME investment gap and the contribution of financing frictions," Papers WP589, Economic and Social Research Institute (ESRI).
    5. repec:eee:quaeco:v:66:y:2017:i:c:p:225-239 is not listed on IDEAS
    6. O'Toole, Conor M. & Morgenroth, Edgar L.W. & Ha, Thuy T., 2016. "Investment efficiency, state-owned enterprises and privatisation: Evidence from Viet Nam in Transition," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 93-108.
    7. Quader, Manzur & Taylor, Karl, 2014. "Corporate Efficiency, Credit Status and Investment," IZA Discussion Papers 8285, Institute for the Study of Labor (IZA).
    8. Murphy, Gavin & Siedschlag, Iulia, 2016. "Exporting under Financing Constraints: Firm-level Evidence from EU Countries," Papers WP530, Economic and Social Research Institute (ESRI).

    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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