151970-Thumbnail Image.png
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

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.
Reuse Permissions


  • Download restricted.
    Download count: 2

    Details

    Title
    • Inventory accumulation, cash flow, and corporate investment
    Contributors
    Date Created
    2013
    Resource Type
  • Text
  • Collections this item is in
    Note
    • thesis
      Partial requirement for: Ph. D., Arizona State University, 2013
    • bibliography
      Includes bibliographical references (p. 62-66)
    • Field of study: Business administration

    Citation and reuse

    Statement of Responsibility

    by Kirak Kim

    Machine-readable links