NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Cash Flow and Investment: Evidence from Internal Capital Markets

Owen Lamont

NBER Working Paper No. 5499
Issued in March 1996
NBER Program(s):   CF   IO   ME

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.

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Published: Journal of Finance, March 1997, Vol. 52, No. 1, pp. 57-82

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