CASH FLOW AND INVESTMENT - EVIDENCE FROM INTERNAL CAPITAL-MARKETS

Using data from the 1986 oil price decrease, I examine the capital exp enditures of nonoil subsidiaries of oil companies. I test the joint hy pothesis that 1) a decrease in cash/collateral decreases investment, h olding fixed the profitability of investment, and 2) the finance costs of different parts of the same corporation are interdependent. The re sults support this joint hypothesis: oil companies significantly reduc ed their nonoil investment compared to the median industry investment. The 1986 decline in investment was concentrated in nonoil units that were subsidized by the rest of the company in 1985.