IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v218y2022ics0165176522002452.html
   My bibliography  Save this article

Exploring nonlinearities between investment and internal funds: Evidence of the U-shaped investment curve

Author

Listed:
  • Borri, Karine T.
  • Martins-Filho, Carlos
  • Kalatzis, Aquiles E.G.

Abstract

We provide new empirical evidence of the relationship between the availability of internal funds and firms’ investment. By employing a semi-parametric fixed effect model, we estimate a U-shaped curve relating investment and internal funds. Our results highlight the importance of allowing for nonlinearities when modeling changes in internal funds and investment, and show that R&D expenses play a critical role on firms’ investment under financial constraints

Suggested Citation

  • Borri, Karine T. & Martins-Filho, Carlos & Kalatzis, Aquiles E.G., 2022. "Exploring nonlinearities between investment and internal funds: Evidence of the U-shaped investment curve," Economics Letters, Elsevier, vol. 218(C).
    • Handle: RePEc:eee:ecolet:v:218:y:2022:i:c:s0165176522002452
    DOI: 10.1016/j.econlet.2022.110713
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176522002452
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2022.110713?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Badi H. Baltagi & Dong Li, 2002. "Series Estimation of Partially Linear Panel Data Models with Fixed Effects," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 103-116, May.
    4. Bronwyn Hall, 2004. "The financing of research and development," Chapters, in: Anthony Bartzokas & Sunil Mani (ed.), Financial Systems, Corporate Investment in Innovation, and Venture Capital, chapter 2, Edward Elgar Publishing.
    5. 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(1), pages 1-39, March.
    6. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    7. 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.
    8. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    9. 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.
    10. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    11. Brown, James R. & Petersen, Bruce C., 2011. "Cash holdings and R&D smoothing," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 694-709, June.
    12. Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1795-1809, September.
    13. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    14. Allayannis, George & Mozumdar, Abon, 2004. "The impact of negative cash flow and influential observations on investment-cash flow sensitivity estimates," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 901-930, May.
    15. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Kadzima, Marvelous & Machokoto, Michael, 2023. "A semi-parametric analysis of the cash flow sensitivity of cash," Finance Research Letters, Elsevier, vol. 56(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Syed Manzur Quader & Mohammed Nayeem Abdullah, 2016. "Cash Flow Sensitivity of Cash: A Cross Country Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 562-572.
    2. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
    3. Vijayakumaran, Ratnam, 2021. "Impact of managerial ownership on investment and liquidity constraints: Evidence from Chinese listed companies," Research in International Business and Finance, Elsevier, vol. 55(C).
    4. Emmanuel Adu‐Ameyaw & Albert Danso & Moshfique Uddin & Samuel Acheampong, 2024. "Investment‐cash flow sensitivity: Evidence from investment in identifiable intangible and tangible assets activities," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1179-1204, April.
    5. Gaurav Gupta & Jitendra Mahakud, 2019. "Alternative measure of financial development and investment-cash flow sensitivity: evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-28, December.
    6. Milos Markovic & Michael A. Stemmer, 2017. "Firm Growth Dynamics and Financial Constraints: Evidence from Serbian Firms," Documents de travail du Centre d'Economie de la Sorbonne 17012, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    7. Attig, Najah & Cleary, Sean & El Ghoul, Sadok & Guedhami, Omrane, 2012. "Institutional investment horizon and investment–cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1164-1180.
    8. Firth, Michael & Malatesta, Paul H. & Xin, Qingquan & Xu, Liping, 2012. "Corporate investment, government control, and financing channels: Evidence from China's Listed Companies," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 433-450.
    9. Najah Attig & Sean Cleary & Sadok Ghoul & Omrane Guedhami, 2014. "Corporate Legitimacy and Investment–Cash Flow Sensitivity," Journal of Business Ethics, Springer, vol. 121(2), pages 297-314, May.
    10. 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.
    11. Thoa, Tu Thi Kim & Uyen, Nguyen Thi Uyen, 2017. "Banking system reform and investment–cash flow relation: Case of a small transition economy," Research in International Business and Finance, Elsevier, vol. 41(C), pages 500-515.
    12. Guariglia, Alessandra & Yang, Junhong, 2016. "A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 111-130.
    13. Andrén, Niclas & Jankensgård, Håkan, 2015. "Wall of cash: The investment-cash flow sensitivity when capital becomes abundant," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 204-213.
    14. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
    15. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    16. Hanna Hottenrott & Bettina Peters, 2012. "Innovative Capability and Financing Constraints for Innovation: More Money, More Innovation?," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1126-1142, November.
    17. Annalisa Croce & José Martí, 2017. "Financial constraints in family firms and the role of venture capital," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 44(1), pages 119-144, March.
    18. Antônio Marcos Hoelz Pinto Ambrozio & Filipe Lage de Sousa & João Paulo Martin Faleiros & André Albuquerque Sant'Anna, 2017. "Credit scarcity in developing countries: An empirical investigation using Brazilian firm-level data," Economia, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 17(1), pages 73-87.
    19. Pellicani, Aline Damasceno & Kalatzis, Aquiles Elie Guimarães, 2019. "Ownership structure, overinvestment and underinvestment: Evidence from Brazil," Research in International Business and Finance, Elsevier, vol. 48(C), pages 475-482.
    20. Flor, Christian Riis & Hirth, Stefan, 2013. "Asset liquidity, corporate investment, and endogenous financing costs," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 474-489.

    More about this item

    Keywords

    Investment decision; Financial constraints; Semi-parametric model; R&D investment;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G3 - Financial Economics - - Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:218:y:2022:i:c:s0165176522002452. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.