The Relationship between Firm Investment and Financial Status

Authors

  • Sean Cleary

    1. Saint Mary's University, Halifax
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    • Saint Mary's University, Halifax. I am grateful to Laurence Booth, Glenn Hubbard, Donald Brean, Paul Halpern, Varouj Aivazian, Raymond Kan, Tom McCurdy, Steve Hadjiyannakis, and participants at the 1996 Northern Finance Association meetings for their valuable comments. The article was improved substantially by incorporating comments from the editor and an anonymous referee. All errors are the responsibility of the author.

Abstract

Firm investment decisions are shown to be directly related to financial factors. Investment decisions of firms with high creditworthiness (according to traditional financial ratios) are extremely sensitive to the availability of internal funds; less creditworthy firms are much less sensitive to internal fund availability. This large sample evidence is based on an objective sorting mechanism and supports the results of Kaplan and Zingales (1997), who also find that investment outlays of the least constrained firms are the most sensitive to internal cash flow.

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