Investment-cash flow sensitivity and the Bankruptcy Reform Act of 1978

Emmanuel Alanis and Margot Quijano

The North American Journal of Economics and Finance, 2019, vol. 48, issue C, 746-756

Abstract: We exploit a change in bankruptcy law in 1978 in the U.S. as an exogenous shock that increased the cost of external funds for public companies. In a quasi-natural experiment setting, we investigate the impact of an increased cost of debt on the investment-cash flow sensitivity of firms. Our results show that the sensitivity of investment to cash flow increased by one third after 1978, and for a sample of firms likely to be more financially constrained the effect was as high as 80%. Our findings suggest the market value of a dollar in cash holdings increased by 12 cents after the change in law, with a larger effect for financially constrained firms.

Keywords: Corporate investment; Cash flow sensitivity; Bankruptcy (search for similar items in EconPapers)
JEL-codes: G30 G31 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:48:y:2019:i:c:p:746-756

DOI: 10.1016/j.najef.2018.08.004

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