Download this Paper Open PDF in Browser

The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing

Dice Center for Research in Financial Economics Working Paper No. 98-10

41 Pages Posted: 25 Oct 1998  

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Catherine M. Schrand

University of Pennsylvania - Accounting Department

Abstract

We document that cash flow volatility is associated with lower levels of investment in capital expenditures, R&D, and advertising. Thus, firms do not turn to external capital markets to fully cover cash-flow short falls. Consistent with this conclusion, we document that the sensitivity of investment to cash flow volatility is greater for firms with higher costs of capital market access. In addition, cash flow and earnings volatility are associated with these higher costs. Thus, volatility not only increases the likelihood that a firm will need to access capital markets, it also increases the costs of doing so.

JEL Classification: G31

Suggested Citation

Minton, Bernadette A. and Schrand, Catherine M., The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing. Dice Center for Research in Financial Economics Working Paper No. 98-10. Available at SSRN: https://ssrn.com/abstract=136712 or http://dx.doi.org/10.2139/ssrn.136712

Bernadette Minton (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

Catherine Schrand

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6798 (Phone)
215-573-2054 (Fax)

Paper statistics

Downloads
1,322
Rank
11,516
Abstract Views
5,038