Composition of Cash Flow Shocks and Corporate Investment

70 Pages Posted: 16 Oct 2016 Last revised: 17 Jan 2019

See all articles by Seong K. Byun

Seong K. Byun

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Valery Polkovnichenko

Federal Reserve Board - Division of Research and Statistic

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: October 14, 2018

Abstract

We empirically analyze firm investment in the presence of temporary and persistent shocks to cash flows. Theoretical models demonstrate that an expectation channel linking current state variables and expected investment arises when shocks are persistent, and the channel is stronger for firms where persistent shocks are more prominent. We find strong support for this prediction and the predicted cross sectional variation in its strength by identifying the firm-level composition of cash flow shocks. Our results underscore the importance of distinguishing persistent and temporary shocks and support existing models with costly external financing linking current state variables to expected future productivity.

Keywords: Persistent and transitory shocks, corporate savings, corporate investment

JEL Classification: G30, G31, G32

Suggested Citation

Byun, Seong K. and Polkovnichenko, Valery and Rebello, Michael J., Composition of Cash Flow Shocks and Corporate Investment (October 14, 2018). Available at SSRN: https://ssrn.com/abstract=2852545 or http://dx.doi.org/10.2139/ssrn.2852545

Seong K. Byun

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Valery Polkovnichenko (Contact Author)

Federal Reserve Board - Division of Research and Statistic ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/vpolkovnichenkoresearchpage

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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