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Investment–Cash Flow Sensitivity: Fact or Fiction?

Published online by Cambridge University Press:  24 May 2017

Şenay Ağca  and
Abon Mozumdar
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Abstract

We examine whether internal funds matter for investment when the measurement error in q is addressed. By carefully employing methodologies that tackle the measurement error in q, we show that cash flow is a significant determinant of investment. We also find that an analyst-forecast-based q measure is not superior to a stock-market-based q measure. We further propose an approach that uses two alternative proxies of q as instruments for addressing measurement error. Our evidence indicates that instrumental-variables-type generalized method of moments estimators yield empirically well-specified models.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 3 , June 2017 , pp. 1111 - 1141
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We are grateful to Jason Cummins, Kevin Hassett, Stephen Oliner, and Toni Whited for making available their data and programs through their Web sites and personal correspondence. For helpful comments and suggestions, we thank Meghana Ayyagari, Mike Cliff, Antonio Galvao (the referee), Paul Malatesta (the editor), Stephen Oliner, N. R. Prabhala, Fabio Schiantarelli, Refik Soyer, Toni Whited, and seminar participants at George Washington University and Virginia Tech. This paper is dedicated to the family of Abon Mozumdar.

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