Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms
C. Edward Fee
Michigan State University - Department of Finance
Charles J. Hadlock
Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management
Joshua R. Pierce
University of South Carolina - Moore School of Business
May 18, 2007
Using a unique, hand-collected dataset, we find a significant positive relation between a firm's U.S. advertising spending and its contemporaneous foreign cash flow. This relation holds even after controlling for factors that should be related to the optimal level of U.S. advertising, and it is stronger for subsets of firms that we expect to be relatively more financially constrained. Our evidence supports the hypothesis that there is a causal and economically substantial link between a firm's cash flow and its investment decisions, even for intangible investments such as advertising. Our evidence also suggests that firms have active internal capital markets in which capital is moved across geographic regions.
Number of Pages in PDF File: 55
Keywords: Investment, advertising, cash flow, financial constraints, internal capital markets
JEL Classification: G31, G32, D92, F23, M37working papers series
Date posted: March 20, 2006
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