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Internal Finance and Firm InvestmentR. Glenn HubbardColumbia Business School - Finance and Economics; National Bureau of Economic Research (NBER) Anil K. KashyapUniversity of Chicago - Booth School of Business; National Bureau of Economic Research (NBER) Toni M. WhitedUniversity of Rochester - Simon Graduate School of Business September 1995 NBER Working Paper No. w4392 Abstract: We examine the neoclassical investment model using a panel of U.S. manufacturing firms. The standard model with no financing constraints cannot be rejected for firms with high (pre-sample) dividend payouts. However, it is decisively rejected for firms with low (pre-sample) payouts (firms we expect to face financing constraints). Hem, investment is sensitive to both firm cash flow and macroeconomic credit conditions, holding constant investment opportunities. Sample splits based on firm size or maturity do not produce such distinctions. The latter comparison identifies firms where "free-cash-flow" problems might be expected to produce correlations between investment and cash flow.
Number of Pages in PDF File: 38 working papers seriesDate posted: May 31, 2004Suggested CitationContact Information
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