Description
I show that firms' ability to adjust variable capital in response to productivity shocks has important implications for the interpretation of the widely documented investment-cash flow sensitivities. The variable capital adjustment is sufficient for firms to capture small variations in profitability, but when the revision in profitability is relatively large, limited substitutability between the factors of production may call for fixed capital investment. Hence, firms with lower substitutability are more likely to invest in both factors together and have larger sensitivities of fixed capital investment to cash flow. By building a frictionless capital markets model that allows firms to optimize over fixed capital and inventories as substitutable factors, I establish the significance of the substitutability channel in explaining cross-sectional differences in cash flow sensitivities. Moreover, incorporating variable capital into firms' investment decisions helps explain the sharp decrease in cash flow sensitivities over the past decades. Empirical evidence confirms the model's predictions.
Details
Title
- Inventory accumulation, cash flow, and corporate investment
Contributors
- Kim, Kirak (Author)
- Bates, Thomas (Thesis advisor)
- Babenko, Ilona (Thesis advisor)
- Hertzel, Michael (Committee member)
- Tserlukevich, Yuri (Committee member)
- Arizona State University (Publisher)
Date Created
The date the item was original created (prior to any relationship with the ASU Digital Repositories.)
2013
Subjects
Resource Type
Collections this item is in
Note
- thesisPartial requirement for: Ph. D., Arizona State University, 2013
- bibliographyIncludes bibliographical references (p. 62-66)
- Field of study: Business administration
Citation and reuse
Statement of Responsibility
by Kirak Kim