Are financing constraints binding for investment? Evidence from a natural experiment

Katarzyna Bilicka

Journal of Economic Behavior & Organization, 2020, vol. 177, issue C, 618-640

Abstract: This paper shows that the availability of cash flows dominates the effects of cost of capital for investment at the firm level. Using an exogenous tax reform in Canada as a quasi-natural experiment, I find that a temporary and unexpected increase in the cost of capital for firms with low availability of retained earnings has no effect on investment of those firms. A subsequent direct increase in the availability of cash flows has large effects on investment. This suggests that internal financing constraints are binding for firms, as they prefer to use low cost retained earnings to finance their investment.

Keywords: Investment; Financing constraints; Retained earnings; Income trusts (search for similar items in EconPapers)
JEL-codes: H25 H32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:177:y:2020:i:c:p:618-640

DOI: 10.1016/j.jebo.2020.06.029

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