Investment, R&D and Liquidity Constraints

In this contribution, we present a novel instrument to control for investment opportunities in studying the investment-cash-flow sensitivity. More in particular we introduce the book value of R&D. We argue this instrument has advantages over other theories of investment, especially when focussing on the corporate governance aspects of the investment-cash-flow sensitivity. On the other hand, it implies the investment-cash-flow sensitivity can only be studied in high-tech environments. These have corporate governance problems of their own. To investigate their effect, a signalling model is extended for R&D induced investment opportunities, and estimated on a panel of Belgian data.

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