Cash Flow and Investment: Evidence from Internal Capital Markets

J. OF FINANCE, Vol. 52 No. 1, March 1997

Posted: 3 Feb 1997

See all articles by Owen A. Lamont

Owen A. Lamont

Harvard University - Department of Economics

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Abstract

Using data from the 1986 oil price decrease, I examine the capital expenditures of non-oil subsidiaries of oil companies. I test the joint hypothesis that 1) a decrease in cash/collateral decreases investment, holding fixed the profitability of investment, and 2) the finance costs of different parts of the same corporation are interdependent. The results support this joint hypothesis: oil companies significantly reduced their non-oil investment compared to the median industry investment. The 1986 decline in investment was concentrated in non-oil units that were subsidized by the rest of the company in 1985.

JEL Classification: G32

Suggested Citation

Lamont, Owen A., Cash Flow and Investment: Evidence from Internal Capital Markets. J. OF FINANCE, Vol. 52 No. 1, March 1997. Available at SSRN: https://ssrn.com/abstract=8075

Owen A. Lamont (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

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