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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

Suggested Citation

  • Baum, Christopher F & Thies, Clifford F, 1999. "Q, Cash Flow and Investment: An Econometric Critique," Review of Quantitative Finance and Accounting, Springer, vol. 12(1), pages 35-47, January.
    • Handle: RePEc:kap:rqfnac:v:12:y:1999:i:1:p:35-47
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    1. Bronwyn H. Hall., 1993. "The Value of Intangible Corporate Assets: An Empirical Study of the Components of Tobin's Q," Economics Working Papers 93-207, University of California at Berkeley.
    2. Klock, Mark & Thies, Clifford F, 1995. "A Test of Stulz's Overinvestment Hypothesis," The Financial Review, Eastern Finance Association, vol. 30(3), pages 387-398, August.
    3. 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.
    4. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-273, March.
    5. Robert S. Chirinko, 1994. "Finance constraints, liquidity, and investment spending: cross-country evidence," Research Working Paper 94-05, Federal Reserve Bank of Kansas City.
    6. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    7. 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.
    8. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
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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.
    2. Tao Shen, 2017. "Credit spreads and investment opportunities," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 117-152, January.
    3. Morales, Rosa & Radoniqi, Fatos, 2017. "Intangibles and the Market Value of Biopharmaceutical Startups," MPRA Paper 88580, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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