Investment and cash flow: evidence for asymmetries in European manufacturing

Authors: Drakos, Konstantinos¹; Kallandranis, Christos¹

Source: Applied Financial Economics, Volume 17, Number 14, October 2007 , pp. 1191-1200(10)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

An 'excess sensitivity' of investment to internal funds (cash flow) is typically interpreted as evidence for the presence of financing constraints. Building on this, we empirically investigate the possibility of an asymmetric response of investment to the availability of internal funds across expectation states. According to our results the impact of cash flow on investment spending is exacerbated during periods of 'pessimism'. Finally, allowing for both potential sources of asymmetries (across different states of expectations and the business cycle) our results indicate that both sources are significant, with the expectations-driven asymmetry being significantly deeper highlighting the paramount role of expectations.

Document Type: Research article

DOI: 10.1080/09603100600843890

Affiliations: 1: Department of Economics, Greece