Wall of cash: The investment-cash flow sensitivity when capital becomes abundant
Author
Summary, in English
In the mid 2000s the oil and gas industry was hit by what might be best described as a 'wall of cash' as oil prices successively reached new record levels and access to external financing improved greatly. In this article we investigate what this sudden abundance of liquidity implied for the investment-cash flow relationship, the interpretation of which continues to generate controversy in the literature. For financially constrained firms we find that the investment-cash flow sensitivity decreases in the abundance period (2005-2008), suggesting that the financing constraints became less binding in this period. For financially unconstrained firms the investment-cash flow sensitivity instead increases over time, suggesting that this relationship is driven by agency problems related to free cash flow. Our paper is the first in the investment-cash flow literature to bring evidence from a natural experiment in which there was an unexpected, exogenous, substantial, and persistent decrease in the cost of external financing. (C) 2014 Elsevier B.V. All rights reserved.
Department/s
Publishing year
2015
Language
English
Pages
204-213
Publication/Series
Journal of Banking & Finance
Volume
50
Document type
Journal article
Publisher
Elsevier
Topic
- Business Administration
Keywords
- Corporate investment
- Financing constraints
- Agency costs
- Investment-cash flow sensitivity
Status
Published
ISBN/ISSN/Other
- ISSN: 1872-6372