Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms
55 Pages Posted: 20 Mar 2006
Date Written: May 18, 2007
Abstract
Using a unique, hand-collected dataset, we find a significant positive relation between a firm's U.S. advertising spending and its contemporaneous foreign cash flow. This relation holds even after controlling for factors that should be related to the optimal level of U.S. advertising, and it is stronger for subsets of firms that we expect to be relatively more financially constrained. Our evidence supports the hypothesis that there is a causal and economically substantial link between a firm's cash flow and its investment decisions, even for intangible investments such as advertising. Our evidence also suggests that firms have active internal capital markets in which capital is moved across geographic regions.
Keywords: Investment, advertising, cash flow, financial constraints, internal capital markets
JEL Classification: G31, G32, D92, F23, M37
Suggested Citation: Suggested Citation
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