Cash Flow and Investment: Evidence from Internal Capital Markets

Abstract

Using data from the 1986 oil price decrease, I examine the capital expenditures of nonoil 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 nonoil investment compared to the median industry investment. The 1986 decline in investment was concentrated in nonoil units that were subsidized by the rest of the company in 1985.

The effect of cash holdings on firm performance in large Italian companies

“…4 Managerial opportunism is facilitated by financial market imperfections: Asymmetric information, incomplete contracts, and agency costs create the conditions to betray managers' discretion at the expense of the rational pursuit of growth of corporate value over the medium and long term (La Rocca, La Rocca, Staglianò, & Cariola, 2012). 5 Some studies suggest that the wedge between the cost of internal vs. external resources increases during periods of recession and is reduced during periods of economic expansion (Gertler & Hubbard, 1989;Lamont, 1997). 6 Rajan and Zingales (2001) highlighted the presence of a significant cause and effect relationship between the type and quality of services offered by the financial system and economic development.…”

Investment cash flow sensitivity and financial constraint: a cluster analysis approach

“…The status of conglomerated firms underlines the key role of financial management, as these firms can reduce the effects of financial constraint by creating an internal capital market and activating processes of reciprocal financial assistance between company divisions (Lamont, 1997;Deloof, 1998;Shin and Park, 1999). In contrast, focused (stand-alone) firms that are unable to take advantage of an available internal capital market face greater financial constraint.…”

“…9 Based on our literature review, we therefore chose the following continuous variables: (a) Leverage (Whited, 1992;Mills et al, 1995;Aivazian et al, 2005), (b) CashStock (Cleary, 1999;Povel and Raith, 2001;Almeida et al, 2004), (c) CF_Volatility (Cleary, 2006) and (d) Age (Devereux and Schiantarelli, 1990;Oliner and Rudebusch, 1992). The following dummy variables were used, as well: (a) No_Div Payout, which is a dummy equal to 1 for firms that have not paid dividends in the last 5 years (Fazzari et al, 1988), (b) D_Unlisting, a dummy equal to 1 for unlisted firms (Kim, 1999) and (c) D_Focused, a dummy equal to 1 for focused firms (stand-alone firms) operating as a single business without diversifying and without benefitting from internal capital markets (Lamont, 1997;Shin and Park, 1999). Taken 8 As suggested by the name 'two-step cluster analysis' the algorithm is based on a two-stage approach (Mooi and Sarstedt, 2011).…”

Bank profitability: Insights from the rural banking industry in Ghana

“…Economies of scope, an improved resource allocation through internal capital markets, and a tax protection because of higher financial leverage are some of the benefits associated with diversification (Kanas et al, 2012). Agency problems (Jensen, 1986), inefficient internal resource allocation due to a malfunctioning of internal capital markets (Lamont, 1997), and increased incentives for rentseeking behavior by managers are some of the costs identified with diversification (Scharfstein & Stein, 2000). However, evidence is mixed.…”