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Cash flow, investment, and investment opportunities: New tests using UK panel data

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  • Carpenter, Robert E.
  • Guariglia, Alessandra

Abstract

The interpretation of the correlation between cash flow and investment is highly controversial. Some argue that it is caused by financial constraints, others by the correlation between cash flow and investment opportunities that are not properly measured by TobinÕs Q. This paper uses UK firmsÕ contracted capital expenditure to capture information about opportunities available only to insiders and thus not included in Q. When this variable is added in investment regressions, the explanatory power of cash flow falls for large firms, but remains unchanged for small firms. This suggests that the significance of cash flow stems from its role in alleviating credit frictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 9 (September)
Pages: 1894-1906

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:9:p:1894-1906

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