Theoretical work on financing costs under asymmetric information has linked shifts in firms' internal funds and investment spending, holding constant investment opportunities. An impediment to convincing tests of these models is the lack of firm-level data on the relative cost of internal and external funds. We use a tax experiment, the surtax on undistributed profits in the 1930s, to identify firms' relative cost of internal and external funds by calculating surtax margins. The investment of high-surtax-margin firms was sensitive to shifts in cash flow, holding constant investment opportunities. Other firms did not display sensitivity of investment to internal funds.
Calomiris, Charles, and R. Glenn Hubbard. "Tax Policy, Internal Finance, and Investment: Evidence from the Undistributed Profits Tax of 1936-1937." Journal of Business 68, no. 4 (October 1995): 443-82.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.