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On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty

Christopher Baum, Mustafa Caglayan () and Oleksandr Talavera ()

No 638, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We investigate the analytical and empirical linkages between cash flow, uncertainty and firms' capital investment behavior. Our empirical approach constructs measures of own- and market-specific uncertainty from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty is an important determinant of firms' investment behavior. Depending on the measure of uncertainty used, investment may be stimulated or curtailed by the effects of uncertainty on its own or through its interactions on cash flow.

Keywords: capital investment; cash flow; financial frictions; uncertainty; CAPM (search for similar items in EconPapers)
JEL-codes: C23 D81 E22 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-02-15, Revised 2008-04-26
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-fmk, nep-mac and nep-rmg
Note: previously circulated as "Firm Investment and Financial Frictions"
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Published, Oxford Economic Papers, 62, 286-306, 2010

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