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Internal capital markets and investment: do the cash flow constraints really bind?


  • Calvin Schnure


Lamont (1997) claims to find evidence of credit market imperfections that distort financing and investment decisions of a sample of oil-dependent firms, as investment by non-oil units fell when oil cash flow dropped. However, a simple test reveals that few of these firms behaved in a fashion consistent with binding cash flow constraints. In addition, most were cash rich. The data provide strong evidence against the hypothesis that investment decisions by non-oil units were significantly affected by oil cash flow, or that credit market imperfections are an important factor for this set of firms.

Suggested Citation

  • Calvin Schnure, 1997. "Internal capital markets and investment: do the cash flow constraints really bind?," Finance and Economics Discussion Series 1997-39, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:1997-39

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    References listed on IDEAS

    1. 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.
    2. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
    3. 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.
    4. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 33-60.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
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    Cited by:

    1. Allard Bruinshoofd, 2003. "Corporate Investment and Financing Constraints: Connections with Cash management," DNB Staff Reports (discontinued) 110, Netherlands Central Bank.
    2. Goldman, Eitan, 2004. "The impact of stock market information production on internal resource allocation," Journal of Financial Economics, Elsevier, vol. 71(1), pages 143-167, January.

    More about this item


    Cash flow ; Liquidity (Economics) ; Investments;


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