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The effect of cash flow on investment: an empirical test of the balance sheet theory

Ola Melander (), Maria Sandström and Erik von Schedvin
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Maria Sandström: Uppsala University

Empirical Economics, 2017, vol. 53, issue 2, No 13, 695-716

Abstract: Abstract Using a large data set on investments and accounting information for private firms, we put the balance sheet theory to test. We find that firm cash flow has a positive impact on investment and that the effect is enhanced for firms which are more likely to be financially constrained. We also find that the investment-cash flow sensitivity is significantly larger and more persistent during the first half of our sample period, which includes a severe banking crisis and recession. Our results suggest that financial constraints matter more in periods characterized by adverse economic conditions.

Keywords: Financial frictions; Balance sheet channel; Financial accelerator; Investment; Cash flow (search for similar items in EconPapers)
JEL-codes: C33 E22 E44 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s00181-016-1136-y

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