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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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  25. 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.
  26. Calomiris, Charles W & Hubbard, R Glenn, 1995. "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-37," The Journal of Business, University of Chicago Press, vol. 68(4), pages 443-82, October.
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