Description

Using Chilean microeconomic data of stock-market traded firms, this paper analyzes the importance of liquidity (cash flow) in firm's investment decisions. Contrary to what the classical theory predicts -only projects profitability matters for investment decisions- and in line with modem corporate finance theory .- in which internal and external funds have different costs- the results show that internal liquidity is an important determinant of investment. Because cash flows could capture access to profitable projects, the paper compares estimates for groups of firms that a-priori have different information asymmetry problems. The results are in line with the idea that liquidity matters for investrnent decisions.