Corporate investment, cash flow level and market imperfections: The case of Norway
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Mundaca, B. Gabriela and Kjell Bjørn Nordal
Number in series: 3
We analyze how investment is related to financial conditions using Norwegian data covering the years 1988-2003, comprising around 1.7 millions observations and 117,000 enterprises. Our criteria used to classify firms within industries are their cash- flow levels and size. Firms with persistent positive cash flows show significant investment-cash flow sensitivity, and much stronger than for firms with persistent negative cash flows. Such sensitivity is, among firms with positive cash flows, significantly stronger for smaller firms than for larger firms. The relationship between their investments and cash flows is negative only for small firms with negative cash flows, while for large firms with negative cash flows this relationship is positive. Firms that operate at a loss rely a great deal on bank loans and cash holdings to finance investment. Our analysis reconciles the results of Fazzari-Hubbard-Petersen with those of Kaplan-Zingales-Cleary.
G31 G32 D21
Financial constraints, internal funds, internal funds, investment-cash flow sensitivity.
Project:Oppdragsgiver: Norges forskningsråd
Frisch prosjekt: 5111 - Liquidity problems, financing constraints and investment decisions: A theoretical modelling with application to Norway