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
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: Suggested Citation