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Wall of cash: The investment-cash flow sensitivity when capital becomes abundant

Andrén, Niclas LU and Jankensgård, Håkan LU (2015) In Journal of Banking & Finance 50. p.204-213
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 literature. For financially constrained firms we find that the investment-cash flow sensitivity decreases in the abundance period (2005-2008), suggesting that the financing constraints became less binding in this period. For financially unconstrained firms the investment-cash flow sensitivity instead increases over time, suggesting that this... (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 literature. For financially constrained firms we find that the investment-cash flow sensitivity decreases in the abundance period (2005-2008), suggesting that the financing constraints became less binding in this period. For financially unconstrained firms the investment-cash flow sensitivity instead increases over time, suggesting that this relationship is driven by agency problems related to free cash flow. Our paper is the first in the investment-cash flow literature to bring evidence from a natural experiment in which there was an unexpected, exogenous, substantial, and persistent decrease in the cost of external financing. (C) 2014 Elsevier B.V. All rights reserved. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Corporate investment, Financing constraints, Agency costs, Investment-cash flow sensitivity
in
Journal of Banking & Finance
volume
50
pages
204 - 213
publisher
Elsevier
external identifiers
  • wos:000347506900014
  • scopus:84918576957
ISSN
1872-6372
DOI
10.1016/j.jbankfin.2014.10.010
language
English
LU publication?
yes
id
2783edcd-8a65-4c89-a4ec-4550531ebb0c (old id 5204194)
date added to LUP
2015-03-25 16:37:20
date last changed
2017-09-24 03:14:07
@article{2783edcd-8a65-4c89-a4ec-4550531ebb0c,
  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 literature. For financially constrained firms we find that the investment-cash flow sensitivity decreases in the abundance period (2005-2008), suggesting that the financing constraints became less binding in this period. For financially unconstrained firms the investment-cash flow sensitivity instead increases over time, suggesting that this relationship is driven by agency problems related to free cash flow. Our paper is the first in the investment-cash flow literature to bring evidence from a natural experiment in which there was an unexpected, exogenous, substantial, and persistent decrease in the cost of external financing. (C) 2014 Elsevier B.V. All rights reserved.},
  author       = {Andrén, Niclas and Jankensgård, Håkan},
  issn         = {1872-6372},
  keyword      = {Corporate investment,Financing constraints,Agency costs,Investment-cash flow sensitivity},
  language     = {eng},
  pages        = {204--213},
  publisher    = {Elsevier},
  series       = {Journal of Banking & Finance},
  title        = {Wall of cash: The investment-cash flow sensitivity when capital becomes abundant},
  url          = {http://dx.doi.org/10.1016/j.jbankfin.2014.10.010},
  volume       = {50},
  year         = {2015},
}