RDP 2005-12: Financial Constraints, the User Cost of Capital and Corporate Investment in Australia 5. Conclusion

The effects of financial factors on corporate investment are estimated using a large sample of listed Australian companies over the period 1990 to 2004. Real sales and the user cost of capital appear to be significant determinants of firm-level investment in both the short and long run.

Theory suggests that internal funding should affect investment if some firms are financially constrained and cannot obtain enough external funding to meet their desired level of investment. However, this paper suggests that, across all firms, the response of investment to cash flow is minimal, whether or not the firms are financially constrained. However, there is evidence that this result may reflect the presence of firms experiencing financial distress (as indicated by the presence of negative cash flow). Among non-distressed firms, the investment response to cash flow is found to be positive, with the estimated sensitivity being roughly the same for both constrained and unconstrained firms. In summary, these results partly contradict the conventional view of the credit channel, and are in contrast to the results of Australian studies using data largely from the 1980s. Nevertheless, they are consistent with the findings of recent international studies.