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RFS Advance Access originally published online on June 6, 2008
Review of Financial Studies 2009 22(6):2361-2392; doi:10.1093/rfs/hhn059
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org.

Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms

C. Edward Fee
Michigan State University

Charles J. Hadlock
Michigan State University

Joshua R. Pierce
University of South Carolina

Send correspondence to Charles J. Hadlock, Department of Finance, 315 Eppley Center, Michigan State University, East Lansing, MI 48824-1121; telephone: (517) 353-9330 or e-mail: hadlock{at}bus.msu.edu.

JEL Classification: G31, G32, D92, G23, M37


  Abstract

We find a significant positive relation between a firm's advertising spending in the United States and its contemporaneous foreign cash flow. This relation holds even after controlling for factors that should be related to the optimal level of domestic 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 cash flow and investment spending, 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.

We thank Heitor Almeida, James Brickley, Laura Field, Michelle Lowry, Ramana Sonti, Toni Whited, Jeff Wooldridge, Jerold Zimmerman, and seminar participants at Cornell, Michigan State, Penn State, Rochester, the University of Western Ontario, the 2006 Oxford Finance Symposium, and the 2006 WFA meetings for helpful comments and discussions. We owe special thanks to two anonymous referees and Toby Moskowitz (the editor) for suggestions that substantially improved the paper. Tehseen Baweja and John Luczak provided superb data assistance. All errors remain our own.


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