Does Cash Flow Cause Investment and R&D?: An Exploration Using Panel Data for French, Japanese, and United States Scientific Firms

Abstract

The role of financial institutions and corporate governance in the conduct and performance of industrial firms, especially in the area of technological innovation and international competition, has been hotly debated in the recent past. The results presented here are a contribution to the empirical evidence on the behavior of individual firms that operate in somewhat different institutional environments. Using a Panel Data version of the Vector Auto Regressive (VAR) methodology, we test for the causal relationship among sales and cash flow on the one hand and investment and R&D on the other in three large panels of firms in the scientific (high technology) sectors in the United States, France, and Japan. Our findings are that both investment and R&D are more highly sensitive to cash flow and sales in the United States than in France and Japan. Correspondingly, investment and R&D predict both cash flow and sales positively in the United States, while their impact is somewhat more mixed in the other countries.

JEL Classification: G34, O32