Date of this Version
Journal of Financial Economics
We show that higher cash flow volatility is associated with lower average levels of investment in capital expenditures, R&D, and advertising. This association suggests that firms do not use external capital markets to fully cover cash flow shortfalls but rather permanently forgo investment. Cash flow volatility also is associated with higher costs of accessing external capital. Moreover, these higher costs, as measured by some proxies, imply a greater sensitivity of investment to cash flow volatility. Thus, cash flow volatility not only increases the likelihood that a firm will need to access capital markets, it also increases the costs of doing so.
© 1999. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
cash flow volatility, investment, cost of equity financing, cost of debt financing
Minton, B. A., & Schrand, C. M. (1999). The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing. Journal of Financial Economics, 54 (3), 423-460. http://dx.doi.org/10.1016/S0304-405X(99)00042-2
Date Posted: 27 November 2017
This document has been peer reviewed.