Cash Flow and Investment: Evidence from Internal Capital Markets

Owen A Lamont

47 citations0/0 files storedNational Bureau of Economic Research

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Corporate Finance and Governance Financial Analysis and Corporate Governance Capital Investment and Risk Analysis

Abstract

Using data from the 1986 oil price decrease, I examine the capital expenditures of non-oil subsidiaries of oil companies. I test the joint hypothesis that 1) a decrease in cash/collateral decreases investment, holding fixed the profitability of investment, and 2) the finance costs of different parts of the same corporation are interdependent. The results support this joint hypothesis: oil companies significantly reduced their non-oil investment compared to the median industry investment. The 1986 decline in investment was concentrated in non-oil units that were subsidized by the rest of the company in 1985.

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1999The Diversification Discount: Cash Flows vs. Returns 2006The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?2011Who’s Going Green and Why? Trends and Determinants of Green Investment 2000Cash Flow, Investment, and Hedging 1996An Analysis of Divisional Investment Policies

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