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A Wall of Cash - The Investment Cash Flow-Sensitivity when Capital Becomes Abundant

Jankensgård, Håkan LU and Andrén, Niclas LU (2013) In Knut Wicksell Working Paper Series 17.
Abstract
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... (More)
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. (Less)
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author
organization
publishing date
type
Working Paper
publication status
published
subject
in
Knut Wicksell Working Paper Series
volume
17
pages
30 pages
publisher
School of Economics and Management, Lund University
language
English
LU publication?
yes
id
e355c0b9-99c8-403f-8f7f-ba74a84858f0 (old id 4124144)
alternative location
http://www.lusem.lu.se/kwc/research/working-papers
date added to LUP
2013-10-25 09:04:10
date last changed
2016-04-16 09:22:57
@misc{e355c0b9-99c8-403f-8f7f-ba74a84858f0,
  abstract     = {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.},
  author       = {Jankensgård, Håkan and Andrén, Niclas},
  language     = {eng},
  pages        = {30},
  publisher    = {ARRAY(0xadeb9e8)},
  series       = {Knut Wicksell Working Paper Series},
  title        = {A Wall of Cash - The Investment Cash Flow-Sensitivity when Capital Becomes Abundant},
  volume       = {17},
  year         = {2013},
}