Document Type
Article
Journal/Book Title/Conference
Journal of Economic Behavior & Organization
Volume
177
Publisher
Elsevier BV
Publication Date
7-21-2020
First Page
1
Last Page
47
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.
Abstract
This paper shows that the availability of cash flows dominates the effects of cost of capital for investment at the firm level. Using an exogenous tax reform in Canada as a quasi-natural experiment, I find that a temporary and unexpected increase in the cost of capital for firms with low availability of retained earnings has no effect on investment of those firms. A subsequent direct increase in the availability of cash flows has large effects on investment. This suggests that internal financing constraints are binding for firms, as they prefer to use low cost retained earnings to finance their investment.
Recommended Citation
Bilicka, Katarzyna. 2020. Are financing constraints binding for investment? Evidence from a natural experiment. Journal of Economic Behavior & Organization. Vol. 177. 1-47. https://doi.org/10.1016/j.jebo.2020.06.029
