The Relationship Between Cash Flow And Capital Expenditure: Evidence From German Automobile Sector

ABSTRACT: The present study investigates the long run equilibrium relationship between cash flow and capital expenditure in German automobile sector as one of the leaders of the automobile industry in the world. Johansen co-integration test confirmed the relationship between cash flow and capital expenditure in the long run. Cash flow has significant and inelastic impact on capital expenditure (-0.963). Error correction model reveals that capital expenditure in German automobile sector converges to its long term equilibrium level reasonably at 31.5% by the contribution of cash flow from operating activities. In short term, effect of cash flow operating on capital expenditure is statistically significant at α=0.1, and it proves that there is a short term relationship between cash flow from operating activities and capital expenditure. Furthermore, this study has proved that the relationship between cash flow and capital expenditure can fluctuate as businesses goes through different cycles of small and large capital expenditures. Keywords: cash flow from operating activities, capital expenditure . …………………………………………………………………………………………………………………………