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Article: Cash flow and capital spending: evidence from capital expenditure announcements.
- Article from:
- Financial Management
- Article date:
- June 22, 1997
- Author:
CopyrightCOPYRIGHT 1997 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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The influence of internally generated cash flow on financing capital investment spending is well documented.(1) Less well understood is the cause behind this influence. Modigliani and Miller's (1958) irrelevance proposition asserts that firms undertake all positive net present value (NPV) investments regardless of the financing source. Consequently, their proposition provides little insight into cash-flow-financed spending. Myers' (1984) pecking-order (PO) hypothesis suggests that cash flow is preferred over other financing sources because it enables firms to avoid raising funds externally with underpriced securities, which dilute existing shareholder value. The PO ...
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