To what extent are savings-cash flow sensitivities informative to test for capital market imperfections?

Tsoukalas, J. , Tsoukas, S. and Guariglia, A. (2017) To what extent are savings-cash flow sensitivities informative to test for capital market imperfections? Review of Finance, 21(3), pp. 1251-1285. (doi: 10.1093/rof/rfw043)

Abstract

We construct a simple model with lumpy investment, cash accumulation and costly external finance. Based on this model, we propose a new savings specification aimed at examining savings behavior in the presence of investment lumpiness and financial constraints. We then test a key prediction of our model, namely, that under costly external finance, savings-cash flow sensitivities vary significantly by investment regime. We make use of a panel of firms from transition and developed economies to estimate the new savings regression which controls for investment spikes and periods of inactivity. Our findings confirm the validity of the model's prediction.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Tsoukalas, Professor John and Tsoukas, Professor Serafeim
• Authors: Tsoukalas, J., Tsoukas, S., and Guariglia, A.
• Subjects: H Social Sciences > HG Finance
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Review of Finance
• Publisher: Oxford University Press
• ISSN: 1572-3097
• ISSN (Online): 1573-692X
• Published Online: 10 September 2016
• Copyright Holders: Copyright © 2016 The Authors
• First Published: First published in Review of Finance 21(3)1251-1285
• Publisher Policy: Reproduced in accordance with the publisher copyright policy