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Q, Cash Flow and Investment: An Econometric Critique

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  • Christopher F. Baum

    ()
    (Boston College)

  • Clifford F. Thies

    ()
    (Shenandoah University)

Abstract

The effect of measurement error on estimates of the Q and cash flow model of investment is investigated. Two sources of error are considered: expensing of research and development expenditures and the failure to separate out that component of cash flow which relaxes financing constraints. We apply random-effects and instrumental variables estimators to remedy these sources of error. When the model is properly identified, Q makes a significant contribution. However, the contribution of unexpected cash flow is not as meaningful as theory would predict, which might be explained by the relatively large size of the firms in the sample.

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File URL: http://fmwww.bc.edu/EC-P/wp332.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 332..

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Length: 24 pages
Date of creation: 01 Jan 1996
Date of revision:
Publication status: published, Review of Quantitative Finance and Accounting, 1999 (12:35-47).
Handle: RePEc:boc:bocoec:332

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Web page: http://fmwww.bc.edu/EC/
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Keywords: Tobin's Q; investment; measurement error; asch flow; R&D expenditure;

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References

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  1. Robert S. Chirinko, 1994. "Finance constraints, liquidity, and investment spending: cross-country evidence," Research Working Paper 94-05, Federal Reserve Bank of Kansas City.
  2. 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.
  3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Andrew B. Abel & Olivier J. Blanchard, 1983. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
  7. 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.
  8. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, 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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