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The effect of cash flow on investment: an empirical test of the balance sheet theory

Author

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  • Ola Melander

    (Sveriges Riksbank)

  • Maria Sandström

    (Uppsala University)

  • Erik Schedvin

    (Sveriges Riksbank)

Abstract

Using a large data set on investments and accounting information for private firms, we put the balance sheet theory to test. We find that firm cash flow has a positive impact on investment and that the effect is enhanced for firms which are more likely to be financially constrained. We also find that the investment-cash flow sensitivity is significantly larger and more persistent during the first half of our sample period, which includes a severe banking crisis and recession. Our results suggest that financial constraints matter more in periods characterized by adverse economic conditions.

Suggested Citation

  • Ola Melander & Maria Sandström & Erik Schedvin, 2017. "The effect of cash flow on investment: an empirical test of the balance sheet theory," Empirical Economics, Springer, vol. 53(2), pages 695-716, September.
    • Handle: RePEc:spr:empeco:v:53:y:2017:i:2:d:10.1007_s00181-016-1136-y
    DOI: 10.1007/s00181-016-1136-y
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    References listed on IDEAS

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    Cited by:

    1. Nehrebecki Marian, 2020. "Cash flow sensitivity of investment: Evidence from the Polish listed companies," Central European Economic Journal, Sciendo, vol. 7(54), pages 157-171, January.
    2. Zabavnik, Darja & Verbič, Miroslav, 2023. "The effects of financial frictions on Slovenian companies: A panel VAR approach," Finance Research Letters, Elsevier, vol. 58(PC).
    3. repec:spo:wpmain:info:hdl:2441/4v8c8tnfgu8g392dpm6uaefuus is not listed on IDEAS
    4. repec:hal:spmain:info:hdl:2441/4v8c8tnfgu8g392dpm6uaefuus is not listed on IDEAS

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    More about this item

    Keywords

    Financial frictions; Balance sheet channel; Financial accelerator; Investment; Cash flow;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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