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Investment and cash flow: evidence for asymmetries in European manufacturing

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  • Konstantinos Drakos
  • Christos Kallandranis

Abstract

An 'excess sensitivity' of investment to internal funds (cash flow) is typically interpreted as evidence for the presence of financing constraints. Building on this, we empirically investigate the possibility of an asymmetric response of investment to the availability of internal funds across expectation states. According to our results the impact of cash flow on investment spending is exacerbated during periods of 'pessimism'. Finally, allowing for both potential sources of asymmetries (across different states of expectations and the business cycle) our results indicate that both sources are significant, with the expectations-driven asymmetry being significantly deeper highlighting the paramount role of expectations.

Suggested Citation

  • Konstantinos Drakos & Christos Kallandranis, 2007. "Investment and cash flow: evidence for asymmetries in European manufacturing," Applied Financial Economics, Taylor & Francis Journals, vol. 17(14), pages 1191-1200.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:14:p:1191-1200
    DOI: 10.1080/09603100600843890
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    References listed on IDEAS

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    1. Annabelle Mourougane & Moreno Roma, 2003. "Can confidence indicators be useful to predict short term real GDP growth?," Applied Economics Letters, Taylor & Francis Journals, vol. 10(8), pages 519-522.
    2. Gert Peersman & Frank Smets, 2005. "The Industry Effects of Monetary Policy in the Euro Area," Economic Journal, Royal Economic Society, vol. 115(503), pages 319-342, April.
    3. Vlieghe, Gertjan & Stephen Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed, 2003. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," Royal Economic Society Annual Conference 2003 212, Royal Economic Society.
    4. Brigitte Desroches & Marc-André Gosselin, 2002. "The Usefulness of Consumer Confidence Indexes in the United States," Staff Working Papers 02-22, Bank of Canada.
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    Cited by:

    1. Mohn, Klaus & Misund, Bård, 2008. "Shifting sentiments in Firm Investment: An Application to the Oil Industry," UiS Working Papers in Economics and Finance 2009/12, University of Stavanger.
    2. María Luisa Saavedra García & Jaime Loé Uribe, 2018. "Flujo de efectivo para las pymes: una propuesta para los sectores automotor y de tecnologías de la información en México," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 10(2), pages 287-308, November.
    3. Christos Kallandranis & Socrates Karidis, 2014. "Assessing the Effect of the Consumer-Voter Sentiment on Tiebout-Like Migration: The EU 27 Case," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 14(1), pages 31-55, April.
    4. Eleftherios Goulas & Athina Zervoyianni, 2013. "The Growth-Crime Relationship: Are There any Asymmetries?," Working Paper series 54_13, Rimini Centre for Economic Analysis.

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