Arbeitspapier
The effect of cash flow on investment: An empirical test of the balance sheet channel
This paper tests the balance sheet theory, where the status of balance sheets affects the economy's response to monetary and other shocks. The theory predicts a positive effect of cash flow on investment, given fundamental determinants of investment. I use an empirical method developed by Gilchrist and Himmelberg (1995, 1999), which has previously only been used to study very large, publicly traded firms. In contrast, this paper uses a large Swedish data set with many smaller firms, where balance sheet effects are likely to be especially important. I find that a firm's cash flow has a positive impact on its investment, controlling for any information in cash flow about investment opportunities. As predicted by the balance sheet channel, the estimated effect of cash flow on investment is especially large for firms which, a priori, are more likely to be financially constrained (low-dividend, small and non-group firms). Moreover, the investment-cash flow sensitivity is significantly larger and more persistent during the first half of the sample period, which includes a severe banking crisis and recession, than during the second half.
- Language
-
Englisch
- Bibliographic citation
-
Series: Sveriges Riksbank Working Paper Series ; No. 228
- Classification
-
Wirtschaft
Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models
Investment; Capital; Intangible Capital; Capacity
Financial Markets and the Macroeconomy
- Subject
-
financial frictions
balance sheet channel
financial accelerator
investment
cash flow
Cash Flow
Bilanz
Investitionsentscheidung
KMU
Panel
Schweden
- Event
-
Geistige Schöpfung
- (who)
-
Melander, Ola
- Event
-
Veröffentlichung
- (who)
-
Sveriges Riksbank
- (where)
-
Stockholm
- (when)
-
2009
- Handle
- Last update
-
10.03.2025, 11:44 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Melander, Ola
- Sveriges Riksbank
Time of origin
- 2009
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