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Investment, Cash Flow, and Sunk Costs

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  • Worthington, Paula R

Abstract

This paper's analysis of U.S. manufacturing industries confirms previous research showing that cash flow and investment spending are positively correlated, even after controlling for investment demand, and it makes two new points as well: firstly, that the effect of cash flow on investment is greater for durable goods industries than for nondurable goods industries and, secondly, that cash flow's effect is significantly larger in industries with high sunk costs than in those with low sunk costs. The latter finding suggests that external financing of capital investment is more difficult when the assets being financed are highly specific or are sunk. Copyright 1995 by Blackwell Publishing Ltd.

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  • Worthington, Paula R, 1995. "Investment, Cash Flow, and Sunk Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 49-61, March.
    • Handle: RePEc:bla:jindec:v:43:y:1995:i:1:p:49-61
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    Cited by:

    1. Konstantinos Drakos & Dimitris Tsouknidis, 2024. "Investment under uncertainty and irreversibility: Evidence from the shipping markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2139-2154, April.
    2. Majumdar, Sumit K. & Chakravarty, Sujoy & Chang, Hsihui, 2009. "Financial considerations and technology investment patterns in a network industry," Technology in Society, Elsevier, vol. 31(1), pages 42-52.
    3. Lambie, Neil Ross, 2009. "The role of real options analysis in the design of a greenhouse gas emissions trading scheme," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 47626, Australian Agricultural and Resource Economics Society.
    4. Ralph de Haas & Marga Peeters, 2006. "The dynamic adjustment towards target capital structures of firms in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(1), pages 133-169, March.
    5. Ciaran Driver & Paul Temple & Giovanni Urga, 2005. "Contrasts Between Classes of Assets in Fixed Investment Equations as a Way of Testing Real Option Theory," School of Economics Discussion Papers 0805, School of Economics, University of Surrey.
    6. Chung-Hua Shen & Chih-Yung Lin, 2016. "Political connections, financial constraints, and corporate investment," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 343-368, August.
    7. Song, Jeongseop & Zhang, Fan, 2024. "Regional market uncertainty and corporate investment," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    8. Heitor Almeida & Murillo Campello, 2006. "Financial Constraints, Asset Tangibility, and Corporate Investment," NBER Working Papers 12087, National Bureau of Economic Research, Inc.
    9. Silva, Mario Rafael, 2019. "Corporate finance, monetary policy, and aggregate demand," Journal of Economic Dynamics and Control, Elsevier, vol. 102(C), pages 1-28.
    10. Campello, Murillo & Hackbarth, Dirk, 2012. "The firm-level credit multiplier," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 446-472.
    11. Marie-Christine Filareto, 2004. "Les déterminants du taux débiteur exigé par le crédit-bailleur : une étude empirique sur le marché français," Économie et Prévision, Programme National Persée, vol. 162(1), pages 111-128.
    12. Llesh Lleshaj & Dorina Kripa, 2021. "The Effect of Financial Leasing Threshold in the Financial Development and Economic Growth: Evidence from Albania," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 165-177.
    13. Wang, Hua & Liao, Lingtao & Wu, Ji (George), 2023. "Robot adoption and firm's capacity utilization: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    14. Rajeev Dhawan, 1997. "Asymmetric Information and Debt Financing: Hie Empirical Importance of Size and Balance Sheet Factors," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(2), pages 189-202.
    15. Schmitt, Nicolas & Weder, Rolf, 1998. "Sunk costs and cartel formation: Theory and application to the dyestuff industry," Journal of Economic Behavior & Organization, Elsevier, vol. 36(2), pages 197-220, August.

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