Cash Flow and Investment: Evidence from Internal Capital Markets

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.

[1]  Luigi Zingales,et al.  Do Financing Constraints Explain Why Investment is Correlated with Cash Flow? , 1995 .

[2]  J. Stein,et al.  Internal Capital Markets and the Competition for Corporate Resources , 1995 .

[3]  E. Ofek,et al.  Diversification's effect on firm value , 1995 .

[4]  Anil K. Kashyap,et al.  Credit Conditions and the Cyclical Behavior of Inventories , 1994 .

[5]  D. Scharfstein,et al.  Internal Versus External Capital Markets , 1994 .

[6]  René M. Stulz,et al.  Leverage, Investment, and Firm Growth , 1994 .

[7]  René M. Stulz,et al.  Tobin's q, Corporate Diversification, and Firm Performance , 1993, Journal of Political Economy.

[8]  Charles P. Himmelberg,et al.  Evidence on the role of cash flow for investment , 1995 .

[9]  Jean Tirole,et al.  Market Liquidity and Performance Monitoring , 1993, Journal of Political Economy.

[10]  A. Shleifer,et al.  What Do Firms Do with Cash Windfalls? , 1993 .

[11]  Toni M. Whited.  Debt, liquidity constraints, and corporate investment: evidence from panel data , 1992 .

[12]  D. Scharfstein,et al.  Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups , 1991 .

[13]  Steven N. Kaplan,et al.  The effects of management buyouts on operating performance and value , 1989 .

[14]  R. Hubbard,et al.  Financial Factors in Business Fluctuations , 1988 .

[15]  Steven M. Fazzari,et al.  Financing Constraints and Corporate Investment , 1987 .

[16]  Sanford J. Grossman,et al.  The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration , 1986 .

[17]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[18]  Andrew B. Abel,et al.  The Present Value of Profits and Cyclical Movements in Investment , 1983 .

[19]  Dale W. Jorgenson,et al.  Tax Policy and Investment Behavior , 1967 .