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Wall of cash: The investment-cash flow sensitivity when capital becomes abundant

In English

Författare

Summary, in English

In the mid 2000s the oil and gas industry was hit by what might be best described as a 'wall of cash' as oil prices successively reached new record levels and access to external financing improved greatly. In this article we investigate what this sudden abundance of liquidity implied for the investment-cash flow relationship, the interpretation of which continues to generate controversy in the literature. For financially constrained firms we find that the investment-cash flow sensitivity decreases in the abundance period (2005-2008), suggesting that the financing constraints became less binding in this period. For financially unconstrained firms the investment-cash flow sensitivity instead increases over time, suggesting that this relationship is driven by agency problems related to free cash flow. Our paper is the first in the investment-cash flow literature to bring evidence from a natural experiment in which there was an unexpected, exogenous, substantial, and persistent decrease in the cost of external financing. (C) 2014 Elsevier B.V. All rights reserved.

Publiceringsår

2015

Språk

Engelska

Sidor

204-213

Publikation/Tidskrift/Serie

Journal of Banking & Finance

Volym

50

Dokumenttyp

Artikel i tidskrift

Förlag

Elsevier

Ämne

  • Business Administration

Nyckelord

  • Corporate investment
  • Financing constraints
  • Agency costs
  • Investment-cash flow sensitivity

Status

Published

ISBN/ISSN/Övrigt

  • ISSN: 1872-6372