Why has the investment-cash flow sensitivity declined so sharply? Rising R&amp;D and equity market developments

Brown, James Robert; Petersen, Bruce C.

doi:10.1016/j.jbankfin.2008.10.009

Cited by 350 publications

(206 citation statements)

References 61 publications

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“…Over the same period the investment-cash ‡ow sensitivity in the US has declined substantially, a fact interpreted by several authors as an alleviation of …rms'…nancial frictions (see, e.g., Agca andMozumdar, 2008, andBrown andPetersen, 2009). Our …ndings point to these developments as an impetus of the deepening skewness of the U.S. business cycle observed during the same period.…”

Section: Introductionsupporting

confidence: 64%

Leverage and Deepening Business Cycle Skewness

Jensen¹,

Petrella

Ravn³

et al. 2017

SSRN Journal

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We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This …nding can be explained by the concurrent increase in the …nancial leverage of households and …rms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further ampli…ed due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, …nancially-driven expansions lead to deeper contractions, as compared with equally-sized non-…nancial expansions.

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Section: Introductionsupporting

confidence: 64%

Leverage and Deepening Business Cycle Skewness

Jensen¹,

Petrella

Ravn³

et al. 2017

SSRN Journal

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“…Kim and Weisbach (2008) suggest equity plays an important role in raising capital for R&D spending. Brown and Petersen (2009) and Brown et al (2012) estimate dynamic panel models and confirm the linkage between stock issues and R&D investment of US and European firms, respectively. Using panel data for 32 countries, Hsu et al (2014) show that overall market capitalization encourages innovation productivity (as measured by patenting).…”

Section: Financial Constraints and Innovationmentioning

confidence: 75%

Subsidies, financial constraints and firm innovative activities in emerging economies

Mateut

2017

Small Bus Econ

108

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This paper investigates the relationship between public subsidies and firm innovation in transition and developing economies, which are likely to have less developed financial markets. Innovation includes the introduction of new products or services and the upgrade of existing ones, which is of particular relevance for these economies. The results obtained using alternative measures of financial constraints and market competition, within a range of econometric techniques, suggesting a positive relation between public subsidies and the innovative activities of 11,998 firms across 30 Eastern Europe and Central Asian countries. This correlation is stronger for firms more likely to be financially constrained.

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“…First, these are constrained firms only, which tend to be small and less likely to issue public debt. Brown and Petersen (2009) observe that in the last few decades, there has been a sharp increase in the use of public equity financing by young firms, suggesting that stock issues may have become a closer substitute for internal financing. Vo (2014) documents that small firms tend to raise more external equity than debt.…”

Section: External Financingmentioning

confidence: 99%

Stock Market Liquidity: Financially Constrained Firms and Share Repurchase

Nguyen

2017

AFR

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Stock liquidity lowers the cost of share ownership to outside investors and decreases firms' cost of capital. This study substantiates that shares of financially constrained firms are significantly less liquid than shares of similar but financially unconstrained firms. Acting as buyers of last resort for their own shares, share repurchases by financially constrained firms enhance stock liquidity, which alleviates the cost of external financing and underinvestment. Increased stock liquidity improves information efficiency, inducing higher added value from incremental capital investments. Further, higher stock liquidity lowers stock volatility and allows financially constrained firms to issue equity.

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Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments

Cited by 350 publications

References 61 publications

Leverage and Deepening Business Cycle Skewness

Leverage and Deepening Business Cycle Skewness

Subsidies, financial constraints and firm innovative activities in emerging economies

Stock Market Liquidity: Financially Constrained Firms and Share Repurchase

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