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Title:Firm Investment and Financial Frictions PDF Logo
Authors:Baum, Christopher F.
Caglayan, Mustafa
Talavera, Oleksandr
Issue Date:2006
Series/Report no.:DIW-Diskussionspapiere 634
Abstract:In this paper we investigate the analytical and empirical linkages between firms? capital investment behavior and financial frictions arising from asymmetric information, proxied by firms? liquidity and degree of uncertainty. Measures of intrinsic and extrinsic uncertainty are derived from firms? daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. We employ a panel of U.S. manufacturing firm data obtained from COMPUSTAT over the 1984?2003 period. Financial frictions captured by interactions between firms? cash flow and both intrinsic and CAPM-based measures of uncertainty have a significant negative impact on firms? investment spending, while extrinsic uncertainty has a positive impact.
Subjects:capital investment
asymmetric information
financial frictions
uncertainty
CAPM
JEL:D81
E22
C23
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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