Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 448: Conditional Investment-Cash Flow Sensitivities and Financing Constraints

Stephen R. Bond and Måns Söderbom (mans.soderbom@economics.gu.se)
Additional contact information
Stephen R. Bond: Nuffield College, Department of Economics and Centre for Business Taxation, University of Oxford, UK and Institute for Fiscal Studies
Måns Söderbom: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG

Abstract: We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external …nance. We present a benchmark model in which this conditional investment-cash flow sensitivity increases monotonically with the cost premium for external …- finance, for …firms in a fi…nancially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate invest- ment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the …first order conditions of our model, and show that this can be estimated directly.

Keywords: Investment; cash flow; …financing constraints.

JEL-codes: D92; E22; G31

33 pages, May 17, 2010

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