Investment-cash flow sensitivity and the Bankruptcy Reform Act of 1978

摘要

We exploit a change in bankruptcy law in 1978 in the U.S. as an exogenous shock that increased the cost of external funds for public companies. In a quasi-natural experiment setting, we investigate the impact of an increased cost of debt on the investment-cash flow sensitivity of firms. Our results show that the sensitivity of investment to cash flow increased by one third after 1978, and for a sample of firms likely to be more financially constrained the effect was as high as 80%. Our findings suggest the market value of a dollar in cash holdings increased by 12 cents after the change in law, with a larger effect for financially constrained firms.