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Author:
Nathalie Moyen   Stefan Platikanov  


Issue Date:
2013


Abstract(summary):

We investigate whether the sensitivity of corporate investment to internal cash flows is related to financing constraints. Besides financing constraints, measurement error in Tobin's q is another competing explanation for the sensitivity, suggested in the literature. Controlling for measurement errors in Tobin's q and using a parsimonious model specification, we find that investment-cash flow sensitivities are positive and vary with financing constraints. Measurement errors in Tobin's q do not explain away the sensitivities for firms facing financing constraints. Evidence of this first-order linear relationship between investment and internal funds are consistent with the larger literature documenting the effects of financing frictions on investment.


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