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The effect of cash flow on investment: an empirical test of the balance sheet theory
Sveriges Riksbank, Monetary Policy Department.
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
Sveriges Riksbank, Monetary Policy Department, Research Division.
2017 (English)In: Empirical Economics, ISSN 0377-7332, E-ISSN 1435-8921, Vol. 53, no 2, p. 695-716Article in journal (Refereed) Published
Abstract [en]

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.

Place, publisher, year, edition, pages
2017. Vol. 53, no 2, p. 695-716
Keywords [en]
Financial frictions, Balance sheet channel, Financial accelerator, Investment, Cash flow
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:uu:diva-334922DOI: 10.1007/s00181-016-1136-yISI: 000407847400013OAI: oai:DiVA.org:uu-334922DiVA, id: diva2:1161300
Funder
The Jan Wallander and Tom Hedelius FoundationAvailable from: 2017-11-29 Created: 2017-11-29 Last updated: 2017-11-29Bibliographically approved

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Sandström, Maria

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