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Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets

By Firat Demir


Based on the Euler equation approach, the paper analyzes the impacts of availability of internal funds on fixed investment spending in the presence of multiple investment options. It is argued that after financial liberalization real sector firms face a portfolio allocation problem between fixed and financial investments. Therefore, depending on the respective rates of returns the availability of internal funds may be a necessary but not sufficient condition for financing real investment projects. The empirical results using firm level data for Mexico and Turkey confirm this hypothesis and suggest that profits from fixed and financial assets have differential effects on fixed investment spending.

Topics: G11 - Portfolio Choice; Investment Decisions, E22 - Capital; Investment; Capacity, C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series, E44 - Financial Markets and the Macroeconomy, O16 - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Year: 2007
DOI identifier: 10.1016/j.worlddev.2008.09.003
OAI identifier:

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