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Financial Market Imperfection, Overinvestment,and Speculative Precaution

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  • Christian Calmès

Abstract

The author uses panel data to assess the sensitivity of investment to cash flow in non-financial firms, taking into account the role their financial health plays in investment decisions. Firms are categorized using a method called the Z-score, a contemporaneous indicator of financial stress that is inversely related to firms’ probability of financial failure. Based on this method, empirical evidence suggests that firms that have the greatest sensitivity of investment to cash flow display the lowest average Z-score. The author also shows that, in this class of firms, investment seems to be partly driven by excessive conservatism, or precaution.

Suggested Citation

  • Christian Calmès, 2004. "Financial Market Imperfection, Overinvestment,and Speculative Precaution," Staff Working Papers 04-27, Bank of Canada.
  • Handle: RePEc:bca:bocawp:04-27
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    References listed on IDEAS

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    Cited by:

    1. Liu, Ying & Papakirykos, Eli & Yuan, Mingwei, 2006. "Market Valuation and Risk Assessment of Canadian Banks," Review of Applied Economics, Review of Applied Economics, vol. 2(1).

    More about this item

    Keywords

    Business fluctuations and cycles;

    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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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