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Investment, Financial Factors and Business Fluctuations

This paper investigates the relationship between investment and internal finance by addressing two recent topics within the theory of imperfect capital markets: the financial accelerator hypothesis and the controversy over the source of the investment-cash flow sensitivity. Using a panel of Italian companies, we estimate an empirical model of investment which adds cash flow as a proxy for the availability of internal funds. By testing for parameter constancy across two sub-samples of independent and group-affiliated firms, we find that the relationship between investment and cash flow is more likely to be explained by the hypothesis of asymmetric information on capital markets (under-investment) than by the managerial discretion view (over-investment). Our results also suggest that, at least for independent companies, the investment-cash flow relationship is counter-cyclical, as predicted by the theory of the financial accelerator.

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File URL: http://www.ceris.cnr.it/ceris/workingpaper/1997/wp17_97.pdf
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Paper provided by Institute for Economic Research on Firms and Growth - Moncalieri (TO) in its series CERIS Working Paper with number 199717.

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Length: 25 pages Keywords : Investimenti, Asimmetrie Informative, Discrezionalità dei manager
Date of creation: Dec 1997
Date of revision:
Handle: RePEc:csc:cerisp:199717
Contact details of provider: Postal: Via Real Collegio, 30 10024 - Moncalieri TO
Phone: +39-11.6824.911
Fax: +39-11.6824.966
Web page: http://www.ceris.cnr.it/
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  1. Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 33-78.
  2. Sanford Grossman & Oliver Hart, . "Corporate Financial Structure and Managerial Incentives," Rodney L. White Center for Financial Research Working Papers 21-79, Wharton School Rodney L. White Center for Financial Research.
  3. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 70-89, Summer.
  4. Gertler, Mark, 1992. "Financial Capacity and Output Fluctuations in an Economy with Multi-period Financial Relationships," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 455-72, July.
  5. Gertler, Mark & Gilchrist, Simon, 1993. " The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 43-64.
  6. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Cho, Y.D., 1995. "Company Investment Decisions and Financial Constrants: An Analysis of a Panel of Korean Manufacturing Firms," Economics Series Working Papers 99177, University of Oxford, Department of Economics.
  9. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  10. Alessandro Sembenelli & Laura Rondi & Fabio Schiantarelli & Brian Sack, 1993. "Firms' Financial And Real Responses To Business Cycle Shocks And Monetary Tightening: Evidence For Large And Small Italian Companies," CERIS Working Paper 199305, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
  11. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Financing Constraints and Corporate Investment: Response to Kaplan and Zingales," NBER Working Papers 5462, National Bureau of Economic Research, Inc.
  12. Alessandro Sembenelli & Diego Margon & Davide Vannoni, 1995. "Panel Ceris Su Dati Di Impresa: Aspetti Metodologici E Istruzioni Per L’Uso," CERIS Working Paper 199507, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
  13. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  14. Schiantarelli, Fabio & Sembenelli, Alessandro, 1996. "Form of ownership and financial constraints : panel data evidence from leverage and investment equations," Policy Research Working Paper Series 1629, The World Bank.
  15. 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.
  16. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
  17. Otto Eckstein & Allen Sinai, 1986. "The Mechanisms of the Business Cycle in the Postwar Era," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 39-122 National Bureau of Economic Research, Inc.
  18. Kashyap, Anil K & Lamont, Owen A & Stein, Jeremy C, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 565-92, August.
  19. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  20. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  21. Anna Bottasso, 1998. "La relazione tra struttura finanziaria e decisioni reali delle imprese: una rassegna critica dell'evidenza empirica," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 57(1), pages 109-155, April.
  22. 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.
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