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Financial Constraints, the User Cost of Capital and Corporate Investment in Australia

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  • Gianni La Cava

    (Reserve Bank of Australia)

Abstract

This paper examines the factors that drive corporate investment in Australia using a panel of listed companies covering the period from 1990 to 2004. Real sales growth is found to be a significant determinant of corporate investment. The user cost of capital, which incorporates both debt and equity financing costs, also appears to be an important determinant. The paper also explores the effects of cash flow on investment, allowing for the possibility that the availability of internal funding could significantly affect the investment of financially constrained firms. Cash flow is found to affect investment, though the effects appear more complicated than previously reported in empirical research using Australian data. One innovation of this study is that it distinguishes financially distressed firms from financially constrained firms. The presence of financially distressed firms appears to bias downwards the sensitivity of investment to cash flow. Once separate account has been taken of firms experiencing financial distress, and in contrast to theory, cash flow is found to matter for the investment of both financially constrained and unconstrained firms. Interestingly, the estimated degree of sensitivity appears to be roughly the same for both groups.

Suggested Citation

  • Gianni La Cava, 2005. "Financial Constraints, the User Cost of Capital and Corporate Investment in Australia," RBA Research Discussion Papers rdp2005-12, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2005-12
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    File URL: http://www.rba.gov.au/publications/rdp/2005/pdf/rdp2005-12.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    investment; user cost of capital; panel data;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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