Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms

55 Pages Posted: 20 Mar 2006

See all articles by C. Edward Fee

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce

Date Written: May 18, 2007

Abstract

Using a unique, hand-collected dataset, we find a significant positive relation between a firm's U.S. advertising spending and its contemporaneous foreign cash flow. This relation holds even after controlling for factors that should be related to the optimal level of U.S. advertising, and it is stronger for subsets of firms that we expect to be relatively more financially constrained. Our evidence supports the hypothesis that there is a causal and economically substantial link between a firm's cash flow and its investment decisions, even for intangible investments such as advertising. Our evidence also suggests that firms have active internal capital markets in which capital is moved across geographic regions.

Keywords: Investment, advertising, cash flow, financial constraints, internal capital markets

JEL Classification: G31, G32, D92, F23, M37

Suggested Citation

Fee, C. Edward and Hadlock, Charles J. and Pierce, Joshua R., Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms (May 18, 2007). Available at SSRN: https://ssrn.com/abstract=892340 or http://dx.doi.org/10.2139/ssrn.892340

C. Edward Fee

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Charles J. Hadlock (Contact Author)

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

315 Eppley Center
East Lansing, MI 48824-1121
United States
517-353-9330 (Phone)
517-432-1080 (Fax)

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

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