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Article: The cash flow/investment relationship: evidence from U.S. manufacturing firms. (includes appendix)
- Article from:
- Financial Management
- Article date:
- June 22, 1994
- Author:
CopyrightCOPYRIGHT 1994 Financial Management Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Substantial empirical evidence documents the strong influence of cash flow on some firms' investment spending.(1) This well-documented relationship between cash flow and investment spending (after controlling for the cost of capital) is inconsistent with both the Modigliani and Miller (1958) irrelevance theorem and the so-called static trade-off theories of financial behavior.(2)
Two recent explanations focus on imperfect information. The pecking order (PO) hypothesis of Myers and Majluf (1984) identifies the adverse selection problem that arises when firm insiders (owners and managers) have better information than the capital markets about the value of their firm. ...