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Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms

Author

Listed:
  • Yuzo Honda

    (School of Economics, Osaka University)

  • Kazuyuki Suzuki

    (Meiji University)

Abstract

The literature maintains the statistical significance of cash flow in the investment equation. One criticism against the financing constraint interpretation of cash flow is that cash flow may be picking up information on the future profitability of a firm which Tobin fs Q fails to capture. We confine ourselves to the investment behavior of unlisted automobile parts suppliers, and use the sales of large automobile makers as an exogenous instrument. Despite the various criticisms against the financing constraint interpretation of cash flow, our statistical evidence does not disagree with the hypothesis.

Suggested Citation

  • Yuzo Honda & Kazuyuki Suzuki, 2006. "Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms," Discussion Papers in Economics and Business 06-24, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:0624
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0624.pdf
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    References listed on IDEAS

    as
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    5. Yuzo Honda & Kazuyuki Suzuki, 2000. "Estimation of the Investment Thresholds of Large Japanese Manufacturers," The Japanese Economic Review, Japanese Economic Association, vol. 51(4), pages 473-491, December.
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    More about this item

    Keywords

    Tobin fs Q; Investment Equation; Cash Flow; Financing Constraint; Japanese Unlisted Firms;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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