Composition of Cash Flow Shocks and Corporate Investment
70 Pages Posted: 16 Oct 2016 Last revised: 17 Jan 2019
Date Written: October 14, 2018
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: Suggested Citation