Conditional Investment-Cash Flow Sensitivities and Financing Constraints

Abstract

We study the sensitivity of investment to cash flow conditional on measures of q in an adjustment costs framework with costly external nance. We present a benchmark model in which this conditional investment-cash flow sensitivity increases monotonically with the cost premium for external - nance, for rms in a nancially constrained regime. Using simulated data, we show that this pattern is found in linear regressions that relate invest- ment rates to measures of both cash flow and average q. We also derive a structural equation for investment from the rst order conditions of our model, and show that this can be estimated directly.