IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Influence of Financial Factors on Corporate Investment

  • Karen Mills

    (Reserve Bank of Australia)

  • Steven Morling

    (Reserve Bank of Australia)

  • Warren Tease

    (Reserve Bank of Australia)

Registered author(s):

    Recent theoretical developments have shown that cash flows and the structure of a firm’s balance sheet may have an important influence on investment. Establishing a link between cash flows, leverage and investment provides insights into the way that monetary policy and cyclical factors more generally influence the corporate sector. If cash flows are an important determinant of investment, then changes in monetary policy (by changing interest rates) will influence investment through a cash flow effect as well as through altering the rate at which the returns to investment are discounted. If this is the case, the higher leverage of the corporate sector implies, other things being equal, that monetary policy may have a larger impact on investment than in the past. Furthermore, it suggests that the effects of monetary policy will be felt unevenly across the corporate sector. The cash flows of highly geared firms will be more sensitive to changes in interest rates than cash flows of firms with minimal leverage. In this paper we use panel-data analysis to examine the impact of financial factors on investment decisions of firms in the Australian corporate sector. We find strong support for the influence of financial factors on investment decisions. Leverage, internally-generated cash flows, and the stock of cash and liquid financial assets are all important influences on investment behaviour, particularly for smaller firms, highly leveraged firms, and firms with high retention ratios.

    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/1994/pdf/rdp9402.pdf
    Download Restriction: no

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9402.

    as
    in new window

    Length:
    Date of creation: May 1994
    Date of revision:
    Handle: RePEc:rba:rbardp:rdp9402
    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

    Order Information: Web: http://www.rba.gov.au/forms/rdp-order-form/

    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. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 1-9, January.
    2. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    5. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
    6. 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.
    7. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 26-29, January.
    8. Eileen Mauskopf & Jeffrey Fuhrer & Peter Tinsley, 1990. "The transmission channels of monetary policy: how have they changed?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 985-1008.
    9. Ben S. Bernanke & John Y. Campbell, 1988. "Is There a Corporate Debt Crisis?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 83-140.
    10. Zvi Griliches & Jerry A. Hausman, 1984. "Errors in Variables in Panel Data," NBER Technical Working Papers 0037, National Bureau of Economic Research, Inc.
    11. Whited, Toni M., 1991. "Investment and financial asset accumulation," Journal of Financial Intermediation, Elsevier, vol. 1(4), pages 307-334, December.
    12. Michael Devereux & Fabio Schiantarelli, 1989. "Investment, Finacial Factors and Cash Flow: Evidence From UK Panel Data," NBER Working Papers 3116, National Bureau of Economic Research, Inc.
    13. Schaller, Huntley, 1990. "A Re-examination of the Q Theory of Investment Using U.S. Firm Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(4), pages 309-25, Oct.-Dec..
    14. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    15. Warwick J. McKibbin & Eric S. Siegloff, 1987. "A Note on Aggregate Investment in Australia," RBA Research Discussion Papers rdp8709, Reserve Bank of Australia.
    16. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    17. 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.
    18. Amihud, Yakov & Lev, Baruch & Travlos, Nickolaos G, 1990. " Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions," Journal of Finance, American Finance Association, vol. 45(2), pages 603-16, June.
    19. 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.
    20. D. E. Allen, 1991. "The Determinants of the Capital Structure of Listed Australian Companies: The Financial Manager's Perspective," Australian Journal of Management, Australian School of Business, vol. 16(2), pages 103-128, December.
    21. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    22. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    23. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    24. Karen Mills & Steve Morling & Warren Tease, 1993. "Balance Sheet Restructuring and Investment," RBA Research Discussion Papers rdp9308, Reserve Bank of Australia.
    Full references (including those not matched with items on IDEAS)

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

    When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp9402. 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.