Internal Finance and Firm Investment
NBER Working Paper No. 4392 (Also Reprint No. r2004)
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.
Published: Journal of Money, Credit and Banking, vol. 27, no. 3, pp. 683-701, August 1995.