Empirical Economics

, Volume 53, Issue 2, pp 695–716 | Cite as

The effect of cash flow on investment: an empirical test of the balance sheet theory

  • Ola Melander
  • Maria Sandström
  • Erik von SchedvinEmail author


Using a large data set on investments and accounting information for private firms, we put the balance sheet theory to test. We find that firm cash flow has a positive impact on investment and that the effect is enhanced for firms which are more likely to be financially constrained. We also find that the investment-cash flow sensitivity is significantly larger and more persistent during the first half of our sample period, which includes a severe banking crisis and recession. Our results suggest that financial constraints matter more in periods characterized by adverse economic conditions.


Financial frictions Balance sheet channel Financial accelerator Investment Cash flow 

JEL Classification

C33 E22 E44 

Supplementary material

181_2016_1136_MOESM1_ESM.pdf (138 kb)
Supplementary material 1 (pdf 139 KB)


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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  • Ola Melander
    • 1
  • Maria Sandström
    • 2
  • Erik von Schedvin
    • 3
    Email author
  1. 1.Monetary Policy DepartmentSveriges RiksbankStockholmSweden
  2. 2.Department of EconomicsUppsala UniversityUppsalaSweden
  3. 3.Research Division, Monetary Policy DepartmentSveriges RiksbankStockholmSweden

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