Abon Mozumdar

The impact of negative cash flow and influential observations on investment-cash flow sensitivity estimates

Abstract Kaplan and Zingales [Quart. J. Econ. 112 (1997) 169] and Clearly [J. Finance 54 (2) (1999) 673] diverge from the large literature on investment–cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms. We examine if this result can be explained by the fact that when firms are in sufficiently bad shape (incurring cash losses), investment cannot respond to cash flow. We find that while Clearys results can be explained by such negative cash flow observations, the Kaplan–Zingales results are driven more by a few influential observations in a small sample. We also record a decline in investment–cash flow sensitivity over the 1977–1996 period, particularly for the most constrained firms.

Foreign Currency–Denominated Debt: An Empirical Examination*

We examine the determinants of debt issuance in 10 major currencies by large U.S. firms. Using the fraction of foreign subsidiaries and tests exploiting the disaggregated nature of our data, we find strong evidence that firms issue foreign currency debt to hedge their exposure both at the aggregate and the individual currency levels. We also find some evidence that firms choose currencies in which information asymmetry between domestic and foreign investors is low. We find no evidence that tax arbitrage, liquidity of underlying debt markets, or legal regimes influence the decision to issue debt in foreign currency.

Predictable changes in yields and forward rates

We consider the patterns in the predictability of interest rates expectations hypothesis (EH), and attempt to account for them with affine models. We make the following points: (i) Discrepancies in the data from the EH take a particularly simple form with forward rates: as theory suggests, the largest discrepancies are at short maturities. (ii) Reasonable estimates of one-factor Cox-Ingersoll-Ross models imply regressions on the opposite side of the EH than we see in the data: regression slopes are greater than one (iii) Multifactore affine models can nevertheless approximate both departures from the EH and other properties of interest rates.

Corporate Hedging and Speculative Incentives: Implications for Swap Market Default Risk

This paper demonstrates a tradeoff between the risk-shifting and hedging incentives of firms and identifies conditions under which each dominates. A firm may have the incentive to hedge in a multi-period context, even if no such incentive exists in a single-period one. Unrestricted access to swaps in the presence of asymmetric information about firm type and the swapping motive would lead to unbounded speculation resulting in breakdowns in swap and debt markets. Price-based methods are unable to control this and market makers have to rely upon additional exposure information or credit enhancement devices to preserve equilibrium.

Investment Cash Flow Sensitivity: Fact or Fiction?

We examine whether internal funds matter for investment when the measurement error in q is addressed. By carefully employing methodologies that tackle the measurement error in q, we show that cash flow is a significant determinant of investment. We also find that an analyst forecast based q measure is not superior to a stock market based one. We further propose an approach that uses two alternative proxies of q as instruments for addressing measurement error. Our evidence indicates that instrumental variables type GMM estimators yield empirically well specified models.