IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

Author Info

Listed author(s):
  • Gianni La Cava

    (Reserve Bank of Australia)

Registered author(s):

    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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.rba.gov.au/publications/rdp/2005/pdf/rdp2005-12.pdf
    Download Restriction: no

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2005-12.

    as
    in new window

    Length:
    Date of creation: Dec 2005
    Handle: RePEc:rba:rbardp:rdp2005-12
    Contact details of provider: Postal:
    GPO Box 3947, Sydney NSW 2001

    Phone: 61-2-9551-8111
    Fax: 61-2-9551-8000
    Web page: http://www.rba.gov.au/
    Email:


    More information through EDIRC

    Keywords: investment; user cost of capital; panel data;

    Find related papers by 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

    This paper has been announced in the following NEP Reports:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Rose Cunningham, 2004. "Finance Constraints and Inventory Investment: Empirical Tests with Panel Data," Staff Working Papers 04-38, Bank of Canada.
    2. 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.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Chatelain, Jean-Bernard & Tiomo, André, 2001. "Investment, the cost of capital, and monetary policy in the nineties in France: a panel data investigation," Working Paper Series 0106, European Central Bank.
    6. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 1-39, March.
    7. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 70-89, Summer.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
    10. Rose Cunningham, 2004. "Finance Constraints and Inventory Investment: Empirical Tests with Panel Data," Macroeconomics 0411015, EconWPA.
    11. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
    12. 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.
    13. Nathalie Moyen, 2004. "Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms," Journal of Finance, American Finance Association, vol. 59(5), pages 2061-2092, October.
    14. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    15. von Kalckreuth, Ulf, 2001. "Monetary transmission in Germany: New Perspectives on Financial Constraints and Investment Spending," Discussion Paper Series 1: Economic Studies 2001,19, Deutsche Bundesbank, Research Centre.
    16. Steve Bond & Costas Meghir, 1994. "Financial constraints and company investment," Fiscal Studies, Institute for Fiscal Studies, vol. 15(2), pages 1-18, May.
    17. 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.
    18. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Ulf von Kalckreuth & Philip Vermeulen, 2003. "New Findings on Firm Investment and Monetary Transmission in the Euro Area," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 73-83.
    19. Eugenio Gaiotti & Andrea Generale, 2002. "Does Monetary Policy Have Asymmetric Effects? A Look at the Investment Decisions of Italian Firms," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 61(1), pages 29-59, June.
    20. Geoffrey Shuetrim & Philip Lowe & Steve Morling, 1993. "The Determinants of Corporate Leverage: A Panel Data Analysis," RBA Research Discussion Papers rdp9313, Reserve Bank of Australia.
    21. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1996. "Financing Constraints and Corporate Investment: Response to Kaplan and Zingales," NBER Working Papers 5462, National Bureau of Economic Research, Inc.
    22. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    23. Toshitaka Sekine, 1999. "Firm Investment and Balance-Sheet Problems in Japan," IMF Working Papers 99/111, International Monetary Fund.
    24. Gábor Kátay & Zoltán Wolf, 2004. "Investment Behavior, User Cost and Monetary Policy Transmission - the Case of Hungary," MNB Working Papers 2004/12, Magyar Nemzeti Bank (Central Bank of Hungary).
    25. 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.
    Full references (including those not matched with items on IDEAS)

    The CitEc project has not yet found citations to this item.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2005-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.