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Using data from the 1986 oil price decrease, I examine the capital expenditures of nonoil 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 nonoil investment compared to the median industry investment. The 1986 decline in investment was concentrated in nonoil units that were subsidized by the rest of the company in 1985.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly This paper examines micro data on U. S. manufacturing firms' inventory behavior during different macroeconomic episodes. Much of the analysis focuses on the 1981-1982 recession, which was apparently caused in large part by tight monetary policy. We find that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period. A similar pattern emerges during the 1974-1975 recession, in which tight money also appears to have played a role. In contrast, such liquidity constraints are largely absent during periods of looser monetary policy in the 1970s and 1980s. This content downloaded from 91.229.229.157 on Tue, 10 Jun 2014 18:23:23 PM All use subject to JSTOR Terms and Conditions 566 Q UARTERLY JOURNAL OF ECONOMICSthat inventories are sensitive to financing conditions-finds scant support in most empirical work. This is our third stylized fact. As Blinder and Maccini [1991, p. 82] put it in their survey paper, "little influence of real interest rates on inventory investment can be found empirically." So where does this leave the simple "financial" account of the cyclical behavior of inventories? In our view, it would be premature to dismiss the theory. The failure of empirical models of inventories to find a significant role for financial variables may say more about the inadequacies of the specifications used in these models than about anything else.There are at least two reasons why standard specificationswhich typically use security market interest rates such as the commercial paper rate as explanatory variables-might do a poor job of capturing changes in "financial conditions," broadly defined. First, some borrowers may face quantity rationing constraints of the sort described by Stiglitz and Weiss [1981], Jaffee and Russell [1976], and others, and thus may be unable to obtain funds at the observed commercial paper rate. Second, some borrowers may be "bank-dependent" in the sense that they require external financing but do not have easy access to public debt markets. To the extent that there are important variations in the relative cost of bank loans versus commercial paper, the commercial paper rate may again be a poor measure of financing costs for these firms.Kashyap, Stein, and Wilcox [1993] (hereinafter KSW) present some aggregate time-series evidence on the relative costs of bank loans and commercial paper. KSW begin by constructing a quantity financing variable, the "mix," which they argue captures movements in bank loan supply. The mix is defined as the ratio of corporate bank borrowing to commercial ...

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