Is Cash Flow a Proxy for Financing Constraints in the Investment Equation? The Case of Unlisted Japanese Firms

Yuzo Honda and Kazuyuki Suzuki
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Yuzo Honda: School of Economics, Osaka University
Kazuyuki Suzuki: Meiji University

No 06-24, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: The literature maintains the statistical significance of cash flow in the investment equation. One criticism against the financing constraint interpretation of cash flow is that cash flow may be picking up information on the future profitability of a firm which Tobin fs Q fails to capture. We confine ourselves to the investment behavior of unlisted automobile parts suppliers, and use the sales of large automobile makers as an exogenous instrument. Despite the various criticisms against the financing constraint interpretation of cash flow, our statistical evidence does not disagree with the hypothesis.

Keywords: Tobin fs Q; Investment Equation; Cash Flow; Financing Constraint; Japanese Unlisted Firms (search for similar items in EconPapers)
JEL-codes: E22 G31 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2006-08
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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