Working Paper: NBER ID: w4392
Authors: R. Glenn Hubbard; Anil K. Kashyap; Toni T. Whited
Abstract: We examine the neoclassical investment model using a panel of U.S. manufacturing firms. The standard model with no financing constraints cannot be rejected for firms with high (pre-sample) dividend payouts. However, it is decisively rejected for firms with low (pre-sample) payouts (firms we expect to face financing constraints). Hem, investment is sensitive to both firm cash flow and macroeconomic credit conditions, holding constant investment opportunities. Sample splits based on firm size or maturity do not produce such distinctions. The latter comparison identifies firms where "free-cash-flow" problems might be expected to produce correlations between investment and cash flow.
Keywords: internal finance; firm investment; financing constraints; neoclassical investment model
JEL Codes: G31; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high presample dividend payouts (G35) | no significant financing constraints (G32) |
| low presample dividend payouts (G35) | significant financing constraints (G32) |
| cash flow and macroeconomic credit conditions (E44) | investment decisions (G11) |
| cash flow (E50) | investment decisions (G11) |
| financing constraints (G32) | investment decisions (G11) |
| macroeconomic credit conditions (E66) | investment decisions (G11) |