A 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 financing constraints-literature. For small and financially constrained firms the investment-cash flow sensitivity decreases in the abundance period (2005-2008), suggesting that these firms became less financially constrained in this period. For large and financially unconstrained firms, however, the investment-cash flow sensitivity increases over time, suggesting that this relationship is driven by agency problems related to free cash flow. Our analysis illustrates the importance of a research design that addresses both these competing explanations of the investment-cash flow relationship.
Department/s
Publishing year
2013
Language
English
Publication/Series
Knut Wicksell Working Paper Series
Volume
17
Links
Document type
Working paper
Publisher
School of Economics and Management, Lund University
Topic
- Business Administration
Status
Published