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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Internal Capital Markets and Investment: Do the Cash Flow Constraints Really Bind?
Calvin Schnure

Abstract: Lamont (1997) claims to find evidence of credit market imperfections that distort financing and investment decisions of a sample of oil-dependent firms, as investment by non-oil units fell when oil cash flow dropped. However, a simple test reveals that few of these firms behaved in a fashion consistent with binding cash flow constraints. In addition, most were cash rich. The data provide strong evidence against the hypothesis that investment decisions by non-oil units were significantly affected by oil cash flow, or that credit market imperfections are an important factor for this set of firms.

Keywords: Cash flow, investment, liquidity constraint

Full paper (848 KB PDF)

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Last update: September 17, 1997