The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing

✍ Scribed by Bernadette A. Minton; Catherine Schrand

• Book ID: 114221676
• Publisher: Elsevier Science
• Year: 1999
• Tongue: English
• Weight: 214 KB
• Volume: 54
• Category: Article
• ISSN: 0304-405X
• DOI: 10.1016/s0304-405x(99)00042-2

✦ Synopsis

We show that higher cash #ow volatility is associated with lower average levels of investment in capital expenditures, R&D, and advertising. This association suggests that "rms do not use external capital markets to fully cover cash #ow shortfalls but rather permanently forgo investment. Cash #ow volatility also is associated with higher costs of accessing external capital. Moreover, these higher costs, as measured by some proxies, imply a greater sensitivity of investment to cash #ow volatility. Thus, cash #ow volatility not only increases the likelihood that a "rm will need to access capital markets, it also increases the costs of doing so.