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Do adjustment costs explain investment-cash flow insensitivity?

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  • Pratap, Sangeeta

Abstract

In this paper, I explain two “puzzles” that have been observed in firm level data. First, firms that display a high sensitivity of investment to cash flow (commonly believed to be an indicator of liquidity constraints) usually have large unutilized lines of credit which, presumably, could be used to overcome the shortage of funds. Second, firms that are perceived to be extremely liquidity constrained actually show very little sensitivity of investment to cash flow.

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  • Pratap, Sangeeta, 2003. "Do adjustment costs explain investment-cash flow insensitivity?," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 1993-2006.
    • Handle: RePEc:eee:dyncon:v:27:y:2003:i:11:p:1993-2006
    DOI: 10.1016/S0165-1889(02)00113-6
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    Cited by:

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    2. Andrea Caggese, 2005. "Financing Imperfections and the Investments Decisions of Privately Owned Firms," Working Papers 265, Barcelona School of Economics.
    3. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms’ Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, September.
    4. Ek, Chanbora & Wu, Guiying Laura, 2018. "Investment-cash flow sensitivities and capital misallocation," Journal of Development Economics, Elsevier, vol. 133(C), pages 220-230.
    5. Giovanni Cerulli & Bianca Potì, 2014. "The Impact of Public Support Intensity on Business R&D: Evidence from a Dose-Response Approach," ERSA conference papers ersa14p625, European Regional Science Association.
    6. Giovanni Cerulli & Bianca Poti', 2016. "Explaining firm sensitivity to R&D subsidies within a dose-response model: The role of financial constraints, real cost of investment, and strategic value of R&D," DEM Working Papers 2016/09, Department of Economics and Management.
    7. DOI Takero, 2016. "Incidence of Corporate Income Tax and Optimal Capital Structure: A dynamic analysis," Discussion papers 16022, Research Institute of Economy, Trade and Industry (RIETI).
    8. Mr. Vadim Khramov, 2012. "Asymmetric Effects of the Financial Crisis: Collateral-Based Investment-Cash Flow Sensitivity Analysis," IMF Working Papers 2012/097, International Monetary Fund.
    9. John Bailey Jones & Sangeeta Pratap, 2020. "An Estimated Structural Model of Entrepreneurial Behavior," American Economic Review, American Economic Association, vol. 110(9), pages 2859-2898, September.
    10. Alessandra Guariglia & John Tsoukalas & Serafeim Tsoukas, 2010. "Investment, irreversibility, and financing constraints in transition economies," Discussion Papers 10/03, University of Nottingham, School of Economics.
    11. Junlu Ma & Zeguang Li & Qunyong Wang, 2009. "Financial constraints, agency cost and firm’s investment behavior: Evidence from listed companies of China," Frontiers of Economics in China, Springer;Higher Education Press, vol. 4(3), pages 384-405, September.

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    More about this item

    Keywords

    Liquidity constraints; Adjustment costs; Tobin's q;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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