Cash flow investment, external funding and the energy transition: Evidence from large US energy firms

We examine the relationship between cash flow and investment in the US energy sector from 1988 to 2020. Our analysis incorporates firms' financial constraints and the type of energy production in which they are engaged, distinguishing between brown and green generation. Our findings reveal a positive relationship between investment and cash flow for green energy firms, which behave similarly to constrained energy firms. While traditional brown energy firms tend to use higher cash flow to increase dividend payments and repurchase equity, green and constrained firms use it to repay debt and to fund investment. Our results suggest that policies aimed at strengthening the linkages between financial intermediaries and green firms could unlock cash flow resources for investment and innovation, facilitating the scaling up of operations during the energy transition. To ensure the sustainability of the transition, it is critical to reduce the reliance of green energy firms on internally generated cash flow, which is subject to volatility and cyclical macroeconomic conditions.