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Q, Cash Flow and Investment: An Econometric Critique

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  • Baum, Christopher F
  • Thies, Clifford F

Abstract

The effects of measurement and specification error on estimates of the Q and cash flow model of investment are investigated. Two sources of error are considered: expensing of R&D expenditures and failing to identify that component of cash flow which relaxes financing constraints. We apply random-effects and instrumental variables estimators to a model that addresses these sources of error. We find that: (1) the capitalization of R&D strengthens the explanatory power of the model; (2) expected and unexpected components of cash flow have different effects; and (3) the effects of Q are much more evident in firms facing low costs of external finance. Copyright 1999 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 12 (1999)
Issue (Month): 1 (January)
Pages: 35-47

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Handle: RePEc:kap:rqfnac:v:12:y:1999:i:1:p:35-47

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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  1. Hall, Bronwyn H., 1993. "The Value of Intangible Corporate Assets: An Empirical Study of the Components of Tobin's Q," Department of Economics, Working Paper Series qt44x548gq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  3. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  4. Chirinko, Robert S., 1993. "Multiple capital inputs, Q, and investment spending," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 907-928.
  5. Klock, Mark & Thies, Clifford F, 1995. "A Test of Stulz's Overinvestment Hypothesis," The Financial Review, Eastern Finance Association, vol. 30(3), pages 387-98, August.
  6. Robert S. Chirinko, 1994. "Finance constraints, liquidity, and investment spending: cross-country evidence," Research Working Paper 94-05, Federal Reserve Bank of Kansas City.
  7. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  8. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
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Cited by:
  1. Gleason, Katherine I. & Klock, Mark, 2006. "Intangible capital in the pharmaceutical and chemical industry," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 300-314, May.

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