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Financial Constraints and Investment: A Quasi-Experiment in the Electricity Sector

We study the impact of financial constraints on the investments behavior of electricity generating utilities. The pollution permit allocation rule of the US SO2 regulation introduced variation in internally available funds, in a industry where firms are otherwise very similar. We use this exogenous variation to identify the relationship between cash flow an investment. Consistent with a financial constraints explanation, this relationship is on average positive but decreases with firm size.

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Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv293.

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Length: 37 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:ila:ilades:inv293
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  16. 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.
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  19. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
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  24. John Asker & Joan Farre-Mensa & Alexander Ljungqvist, 2011. "Comparing the Investment Behavior of Public and Private Firms," NBER Working Papers 17394, National Bureau of Economic Research, Inc.
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  26. 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.
  27. Robert S. Chirinko & Huntley Schaller, 1993. "Why does liquidity matter in investment equations?," Research Working Paper 93-13, Federal Reserve Bank of Kansas City.
  28. 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.
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