The relationship between fixed investment and cash flow : evidence for Portuguese manufacturing sector

Recent developments in the field of information economics have demonstrated that there is a link between financial factors and business fixed investment decisions. This link is due to the existence of information asymmetries in financial markets, which prevents a perfect substitution between funds for finance that firms can access. Therefore, internal funds become cheaper than external funds – and an hierarchy of finance is created. In this paper we present the results of a study aimed at assessing the link between investment decisions of firms and their financial status for the case of the Portuguese manufacturing sector, based on the methodology proposed by Fazzari et al (1988). The results obtained seem to lend support to the financial restrictions hypothesis