Investment-Cash Flow Sensitivity and the Cost of External Finance

Klaas Mulier, Koen Schoors and Bruno Merlevede

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We contribute to the investment-cash ow sensitivity debate by creating a new index to identify the supply of finance to firms. We find that firms that are considered constrained according to our index pay a higher interest rate on their debt, and display the highest investment-cash fl ow sensitivities. Moreover, these findings are not driven by the possible information content of cash fl ow regarding investment opportunities as we control for oppor- tunities by augmenting our empirical model with firm-level employment growth. We thus provide new evidence consistent with Campbell et al. (2012) that the cost of capital is the driving force behind investment-cash fl ow sensitivity.

Keywords: Investment-cash flow sensitivity; cost of finance (search for similar items in EconPapers)
JEL-codes: D92 E22 G31 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-11
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:14/890

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