Why Has the Investment-Cash Flow Sensitivity Declined so Sharply? Rising R&D and Equity Market Developments

46 Pages Posted: 29 May 2009

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Bruce C. Petersen

Washington University in St. Louis - Department of Economics

Date Written: October 15, 2008

Abstract

The study of the investment-cash flow (ICF) sensitivity constitutes one of the largest literatures in corporate finance, yet little is known about changes in the ICF relationship over time, and the literature has largely ignored how rising R&D investment and developments in equity markets have impacted ICF sensitivity estimates. We show that for the time period 1970-2006, the ICF sensitivity: i) largely disappears for physical investment, ii) remains comparatively strong for R&D, and iii) declines, but does not disappear, for total investment. We argue that these findings can largely be explained by the changing composition of investment and the rising importance of public equity as a source of funds, particularly for firms with persistent negative cash flows.

Keywords: Financing constraints, Cash flow, Stock issues, R&D, Physical investment

JEL Classification: G31, G32

Suggested Citation

Brown, James R. and Petersen, Bruce Clayton, Why Has the Investment-Cash Flow Sensitivity Declined so Sharply? Rising R&D and Equity Market Developments (October 15, 2008). Journal of Banking and Finance, Vol. 33, No. 5, 2009. Available at SSRN: https://ssrn.com/abstract=1411230

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Bruce Clayton Petersen

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5643 (Phone)

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