Paper examines the neoclassical model using a panel of U.S. manufacturing firms.
The standard model with no financing constraints cannot be rejected for firms with
high (pre-sample) dividend payouts. However, it is decisively rejected for firms
with low (pre-sample) payouts (firms we expect to face financing constraints). Here,
investment is sensitive to both firm cash flow and macroeconomic credit conditions,
holding constant investment opportunities. Sample splits based on firm size or maturity
do not produce such distinction. The letter comparison identifies firms where "free-cash-flow"
problems might be expected to produce correlations between investment and cash flow.