Fixed investment, liquidity, and access to capital markets: New evidence

a r t i c l e i n f o We re-evaluate the cash flow–investment relation from a new angle in a setting where the firm can access capital markets and faces different investment opportunity sets. Instead of replying on cash flow, we introduce other forms of finance to interact with investment. We find that financial variables enter significantly into the investment regressions at different timing. The cash flow effect reduces after the IPO and especially after the SEO, but remains positive for the firm with greater investment opportunities. Similar reductions in the long-term debt effect and especially in the working capital effect are also identified. The reductions are more pronounced in SMEs than in large firms. We draw the following conclusions. First, the cash flow–investment relation is not constant but evolves. Different forms of finance play concomitant roles covering cash flow shortfalls , jointly determining the dynamics of investment. Second, the investment–cash flow sensitivities do not constitute evidence of external financial constraints. Rather, the excess sensitivities are a response to the investment policy that is to drive asset growth or to maintain business operations. Essentially, growth opportunities are not in the cash flow terms but are embedded in the investment policy. Our study offers an alternative explanation for the investment–cash flow sensitivities. Going public is a significant new phase for any company in its life cycle. The decision to go public and raise further capital is a response to both investment opportunities and the lack of access to other sources of capital. Fama and French (2005) document that the firm frequently issues equity to finance its asset growth and equity issues are, thus, quantitatively important for firm investment. Virtually all studies concerning the cash flow–investment relation examine the interactions between financial and investment decisions using a sample of publicly listed companies, but equity finance has not been formally acknowledged in the investment function. consider equity capital in the cash flow–investment relation. Moyen and Brown and Petersen, however , look at equity issues at the aggregated market level for a sample of US companies, which offers little insight into how equity capital interacts with the investment behavior at the firm level. Goergen and Renneboog examine the cash flow–investment relation using a sample of UK companies that conduct rights issues, and attribute the excess sensitivities to financial constraints. However, the decision to raise equity capital by way of an initial …