Investment, Cash Flow, and Sunk Costs

Paula R Worthington

Journal of Industrial Economics, 1995, vol. 43, issue 1, 49-61

Abstract: This paper's analysis of U.S. manufacturing industries confirms previous research showing that cash flow and investment spending are positively correlated, even after controlling for investment demand, and it makes two new points as well: firstly, that the effect of cash flow on investment is greater for durable goods industries than for nondurable goods industries and, secondly, that cash flow's effect is significantly larger in industries with high sunk costs than in those with low sunk costs. The latter finding suggests that external financing of capital investment is more difficult when the assets being financed are highly specific or are sunk. Copyright 1995 by Blackwell Publishing Ltd.

Date: 1995
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