P. Schnorpfeil 2017-10-08T13:18:47+00:00

Junior Management Science

Volume 2, Issue 1, Pages 17-48, June 2017
Investment-Cash Flow Sensitivity – A Focus on the Panel-Data Econometrics Involved

Philip Schnorpfeil, WHU – Otto Beisheim School of Management

Abstract
I revisit Fazzari, Hubbard, and Petersen’s (1998) seminal paper on the investment-cash flow sensitivity as a measure of financing constraints and augment their approach with the findings from recent papers. I find that the investment-cash flow sensitivity has decreased and mostly disappeared over time, in line with recent literature. This finding is robust to alternative specifications and a number of robustness checks. I contribute to the literature by explicitly analyzing the strict-exogeneity assumption of the fixed-effects and first-differences estimators in empirical practice. In this setting, strict exogeneity does not hold and the violation can cause substantial inconsistencies.

Keywords: Investment-cash flow sensitivity; Capital market imperfections; Strict exogeneity; Panel data

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