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

Further Evidence On The Relationship Between Firm Investment And Financial Status

Author Info

Listed author(s):
  • von Kalckreuth, Ulf
  • Chirinko, Robert S.

Abstract

The interpretation of the significant relation between business investment spending and cash flow has been controversial. A large body of research has found that investment/cash flow sensitivities are higher for financially constrained firms. This fundamental result underlying the finance constraints hypothesis has been challenged recently by Kaplan, Zingales, and Cleary. The latter author introduces an important new element to this debate by using discriminant analysis, which allows creditworthy firms to be identified using an objective ex-ante criterion based on dividend payouts. Consistent with the Kaplan and Zingales critique, investment/cash flow sensitivities are lower for financially constrained firms. This short paper documents that the use of discriminant analysis does not necessarily lead to lower sensitivities. Our contrasting results are traceable to the use of the firm's creditworthiness as the discriminating variable and appropriate adjustments for endogenous regressors and serially correlated residuals. We document that the investment/cash flow sensitivity is higher for financially constrained firms.

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: https://www.econstor.eu/bitstream/10419/19585/1/200228dkp.pdf
Download Restriction: no

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2002,28.

as
in new window

Length:
Date of creation: 2002
Handle: RePEc:zbw:bubdp1:4193
Contact details of provider: Postal:
Postfach 10 06 02, 60006 Frankfurt

Phone: 0 69 / 95 66 - 0
Fax: 0 69 / 95 66 30 77
Web page: http://www.bundesbank.de/
Email:


More information through EDIRC

Keywords:

Other versions of this item:

Find related papers by JEL classification:
  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  2. Joe Peek & Eric S. Rosengren, 1995. "Is bank lending important for the transmission of monetary policy? An overview," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-11.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
  4. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-940, September.
  5. Fabio Schiantarelli, 1995. "Financial constraints and investment: a critical review of methodological issues and international evidence," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 39, pages 177-226.
  6. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  7. Ben Bernanke & Mark Gertler, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 87-114.
  8. Lawrence R. Klein, 1951. "Studies in Investment Behavior," NBER Chapters,in: Conference on Business Cycles, pages 233-318 National Bureau of Economic Research, Inc.
  9. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities are Useful: A Comment on Kaplan and Zingales," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 695-705.
  10. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc.
  11. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  12. 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.
  13. Gustavo Grullon & Roni Michaely & Bhaskaran Swaminathan, 2002. "Are Dividend Changes a Sign of Firm Maturity?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 387-424, July.
  14. Franklin Allen & Antonio E. Bernardo & Ivo Welch, 2000. "A Theory of Dividends Based on Tax Clienteles," Journal of Finance, American Finance Association, vol. 55(6), pages 2499-2536, December.
  15. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
  16. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities Are Not Valid Measures of Financing Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 707-712.
  17. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  18. Oliner, Stephen D & Rudebusch, Glenn D, 1992. "Sources of the Financing Hierarchy for Business Investment," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 643-654, November.
  19. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  20. 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)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


Cited by:

  1. von Kalckreuth, Ulf & Murphy, Emma, 2005. "Financial constraints and capacity adjustment in the United Kingdom: Evidence from a large panel of survey data," Discussion Paper Series 1: Economic Studies 2005,01, Deutsche Bundesbank, Research Centre.
  2. Döpke, Jörg & Funke, Michael & Holly, Sean & Weber, Sebastian, 2005. "The cross-sectional dynamics of German business cycles: a bird's eye view," Discussion Paper Series 1: Economic Studies 2005,23, Deutsche Bundesbank, Research Centre.
  3. Jérôme Héricourt & Sandra Poncet, 2007. "FDI and credit constraints : firm level evidence in China," Documents de travail du Centre d'Economie de la Sorbonne bla07009, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Philip Vermeulen & Ulf Von Kalckreuth, 2003. "New Findings on Firm Investment and Monetary Policy Transmission in the Euro Area," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00119490, HAL.
  5. Ciaran Driver & Paul Temple, 2004. "Shareholder Value or Competitive Advantage? Evidence from Hurdle Rates," School of Economics Discussion Papers 0104, School of Economics, University of Surrey.
  6. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
  7. Héricourt, Jérôme & Poncet, Sandra, 2009. "FDI and credit constraints: Firm-level evidence from China," Economic Systems, Elsevier, vol. 33(1), pages 1-21, March.
  8. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, vol. 75(1), pages 269-301, October.
  9. Agustinus, Prasetyantoko, 2007. "Foreign Ownership and Firm Financing Constraint in Indonesia," MPRA Paper 6500, University Library of Munich, Germany.
  10. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung & Max-Planck-Institut fü (ed.), 2006. "Reform der Einkommens- und Unternehmensbesteuerung durch die Duale Einkommensteuer. Expertise im Auftrag der Bundesminister der Finanzen und für Wirtschaft und Arbeit vom 23. Februar 2005," Occasional Reports / Expertisen, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, number 75365.
  11. Strotmann, Harald & Döpke, Jörg & Buch, Claudia M., 2006. "Does trade openness increase firm-level volatility?," Discussion Paper Series 1: Economic Studies 2006,40, Deutsche Bundesbank, Research Centre.
  12. repec:hal:journl:halshs-00144621 is not listed on IDEAS
  13. Artur Tarassow, 2015. "Financial Investment Constraints. A Panel Threshold Application to German Firm Level Data," Macroeconomics and Finance Series 201405, Hamburg University, Department Wirtschaft und Politik.
  14. Ulf von Kalckreuth, 2005. "Financial constraints and real activity: a non-structural approach using UK survey data," BIS Papers chapters,in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 64-80 Bank for International Settlements.

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:zbw:bubdp1:4193. 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: (ZBW - German National Library of Economics)

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.