nach oben

Empirical Economics

Erschienen in:

24.08.2016

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

verfasst von: Ola Melander, Maria Sandström, Erik von Schedvin

Erschienen in: Empirical Economics | Ausgabe 2/2017

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

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.

Vorheriger Artikel Markups and bargaining power in tradable and non-tradable sectors

Nächster Artikel On the ambiguous economic freedom–inequality relationship

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

The crisis in early 1990s is the most severe financial and economic crisis that Sweden has experienced in modern times. GDP fell for three consecutive years accompanied by a severe contraction of bank credit (see Figure A1 of supplementary material). In contrast, the global financial crisis in 2008 led to a sharp fall in exports but a quick recovery.

For examples of more recent work, see Chatelain et al. (2003), Carpenter and Guariglia (2008) and Martinez-Carrascal and Ferrando (2008).

This presentation follows Cummins et al. (2006). The model was originally developed by Hayashi (1982).

However, the purpose of this paper is to empirically test for financial frictions rather than theoretical modeling. See Gertler (1988) for a broad survey with a focus on theoretical models, and Bernanke et al. (1999) for a representative model.

Some other criticisms of the investment-cash flow sensitivity literature are that: (1) it is not necessarily true that investment-cash flow sensitivities measure the degree of financing constraints (see Kaplan and Zingales 1997, 2000; Gomes 2001), and (2) the positive coefficient on cash flow disappears when the earnings forecasts of equity analysts are used to construct Q (see Cummins et al. 2006).

See Gilchrist and Himmelberg (1995) and Schiantarelli (1995) for further discussion and additional references.

GH also develop a second, more structural method to control for possible information in cash flow about investment opportunities (current and future MPK). Following Love and Zicchino (2006), we do not use this alternative method, which has been criticized for not properly identifying the effect of cash flow on investment (see, for example, footnote 11 in Cummins et al. 2006).

Another possible measure of MPK, which is used by GH in their earlier paper, is based on operating income rather than sales. As discussed in Gilchrist and Himmelberg (1999), the operating-income-based measure requires the possibly unrealistic assumptions of zero fixed costs and perfect competition, which makes the measure less reliable.

See, for example, footnote 11 in Chatelain et al. (2003).

For 1996, Statistics Sweden had data-collection problems and the separate variables for investments in machines and buildings are missing.

Looking at the impulse responses, the confidence bands are collapsing around the point estimates for the response of I/K and MPK to an I/K shock. There are two reasons for this. The first reason is that the standard error of the estimate of the effect of an I/K shock in time t on I/K and \(\textit{MPK}\) in time \(t+1\) is very low. The second reason is that the coefficients for the effect of an I/K shock in time t on MPK and CF/K in time t are very small. This means that there is little feedback from MPK and CF/K in period t to I/K in period \(t+1\) and thus very little uncertainty around that estimate. These effects combined lead to the very low uncertainty around the estimate of the effect of an I/K shock on I/K and MPK.

The double sample split gives rise to few observations on the unconstrained firms in the two sub-periods. We therefore obtain a high estimation uncertainty and wide confidence bands for the group of unconstrained firms. None of the impulse responses are distinct from zero at a 99 % confidence level for the unconstrained (high-dividend, large and group) firms, whereas the impulse responses for the constrained (low-dividend, small and non-group) firms are separate from zero at a 99 % confidence level during the recession period but not significant (99 % level) during the non-recession period.

By splitting the firms based on time and dividend payments, we obtain relatively few observations for the sample of high-dividend firms during the recession period (1055 observations). Although we truncate our sample with respect to the 1st and 99th percentile, the estimates for the small sample are influenced by a few large positive values for the cash flow to capital (CF/K) variable which lead to a high estimation uncertainty and very wide confidence intervals. To deal with this, for the sample of high-dividend firms in the recession period, we have chosen to eliminate observations for CF/K that exceed 200 % (3 observations) to obtain more reasonable estimates and associated standard errors.

Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econom 68:29–51CrossRef

Bernanke BS, Gertler M, Gilchrist SG (1996) The financial accelerator and the flight to quality. Rev Econ Stat 78:1–15CrossRef

Bernanke BS, Gertler M, Gilchrist SG (1999) The financial accelerator in a quantitative business cycle framework. In: Taylor JB, Woodford M (eds) Handbook of macroeconomics. Elsevier, Amsterdam, pp 1341–1393CrossRef

Blanchard OJ, Rhee C, Summers LH (1993) The stock market, profit, and investment. Q J Econ 108:115–136CrossRef

Bond S, Meghir C (1994) Dynamic investment models and the firm’s financial policy. Rev Econ Stud 61:197–222CrossRef

Carpenter RE, Guariglia A (2008) Cash flow, investment, and investment opportunities: new tests using UK Panel Data. J Bank Finance 32:1894–1906CrossRef

Chatelain JB, Generale A, Hernando I, Vermeulen P, von Kalckreuth U (2003) Firm investment and monetary policy transmission in the Euro area. In: Angeloni I, Kashyap AK, Mojon B (eds) Monetary policy transmission in the Euro area. Cambridge University Press, Cambridge, pp 133–161CrossRef

Christiano LJ, Trabandt M, Walentin K (2011) Introducing financial frictions and unemployment into a small open economy model. J Econ Dyn Control 35:1999–2041CrossRef

Cummins JG, Hassett KA, Oliner SD (2006) Investment behavior, observable expectations, and internal funds. Am Econ Rev 96:796–810CrossRef

Fazzari SM, Hubbard RG, Petersen BC (1988) Financing constraints and corporate investments. Brook Pap Econ Act 1:141–195CrossRef

Gertler M (1988) Financial structure and aggregate economic activity. J Money Credit Bank 20:559–588CrossRef

Gertler M, Gilchrist SG (1994) Monetary policy, business cycles, and the behavior of small manufacturing firms. Q J Econ 109:309–340CrossRef

Gilchrist SG, Himmelberg CP (1995) Evidence on the role of cash flow for investment. J Monet Econ 36:541–572CrossRef

Gilchrist SG, Himmelberg CP (1999) Investment, fundamentals and finance. In: Bernanke BS, Rotemberg JJ (eds) NBER macroeconomics annual 1998. MIT Press, Cambridge, pp 223–262

Gilchrist SG, Himmelberg CP, Huberman G (2005) Do stock price bubbles influence corporate investment? J Monet Econ 52:805–827CrossRef

Gomes JF (2001) Financing investment. Am Econ Rev 91:1263–1285CrossRef

Hayashi F (1982) Tobin’s marginal q and average q: a neoclassical interpretation. Econometrica 50:213–224CrossRef

Hubbard RG (1998) Capital–market imperfections and investment. J Econ Lit 36:193–225

Jiménez G, Ongena S, Peydró J, Saurina J (2012) Credit supply and monetary policy: identifying the bank balance-sheet channel with loan applications. Am Econ Rev 102:2301–2326CrossRef

Kaplan SN, Zingales L (1997) Do investment-cash flow sensitivities provide useful measures of financing constraints? Q J Econ 112:169–215CrossRef

Kaplan SN, Zingales L (2000) Investment-cash flow sensitivities are not valid measures of financing constraints. Q J Econ 115:707–712CrossRef

Love I, Zicchino L (2006) Financial development and dynamic investment behavior: evidence from panel VAR. Q Rev Econ Finance 46:190–210CrossRef

Martinez-Carrascal C, Ferrando A (2008) The impact of financial position on investment: an analysis for non-financial corporations in the Euro area. ECB working paper no. 943

Oliner SD, Rudebusch GD, Sichel DE (1996) The Lucas critique revisited: assessing the stability of empirical euler equations for investment. J Econom 70:291–316CrossRef

Poterba JM (1988) Comment on financing constraints and corporate investments. Brook Pap Econ Act 1:200–204

Schiantarelli F (1995) Financial constraints and investment: a critical review of methodological issues and international evidence. In: Peek J, Rosengren ES (eds) Is bank lending important for the transmission of monetary policy. Conference series no. 39, Federal Reserve Bank of Boston, pp 177–214

Shiller RJ (2000) Irrational exuberance. Princeton University Press, Princeton

Whited TM (1992) Debt, liquidity constraints, and corporate investment: evidence from panel data. J Finance 47:1425–1460CrossRef

Zeldes SP (1989) Consumption and liquidity constraints: an empirical investigation. J Polit Econ 97:305–346CrossRef

Titel: The effect of cash flow on investment: an empirical test of the balance sheet theory
verfasst von: Ola Melander
Maria Sandström
Erik von Schedvin
Publikationsdatum: 24.08.2016
Verlag: Springer Berlin Heidelberg
Erschienen in: Empirical Economics / Ausgabe 2/2017
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-016-1136-y

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft"

Springer Professional "Wirtschaft+Technik"

Weitere Artikel der Ausgabe 2/2017

The housing market and excess monetary liquidity in China

Segregation and gender wage gaps in the private and the public sectors: an analysis of Danish linked employer–employee data, 2002–2012

A capable wife: couple’s joint decisions on labor supply and family chores

Time-varying persistence in US inflation

The impact of targeting policy on spouses’ demand for public goods, labor supplies and sharing rule

Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models

Premium Partner