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The Cash Flow/investment Relationship: Evidence from U.S. Manufacturing Firms


  • Stephen C. Vogt


This paper explores reasons for the strong relationship between cash flow and capital investment spending. The equilibrium level of Tobin's q is used to distinguish between liquidity constraints arising from asymmetric information and managerial over-investment of free cash flow. Results suggest that both the Jensen (1986) free cash flow and the Myers and Majluf (1984) pecking order hypotheses are potential explanations for the investment/cash flow relationship. Free cash flow behavior appears to arise most strongly in large, low-dividend firms when they invest in tangible assets. Pecking order behavior appears to arise in smaller, low-dividend firms and in firms making less tangible investments.

Suggested Citation

  • Stephen C. Vogt, 1994. "The Cash Flow/investment Relationship: Evidence from U.S. Manufacturing Firms," Financial Management, Financial Management Association, vol. 23(2), Summer.
  • Handle: RePEc:fma:fmanag:vogt94

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