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Q, Cash Flow and Investment: An Econometric Critique

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Author Info

  • 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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Related research

Keywords: Tobin's Q; investment; measurement error; asch flow; R&D expenditure;

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References

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  1. 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.
  2. 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.
  3. 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.
  4. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  5. 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.
  6. 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.).
  7. Robert S. Chirinko, 1994. "Finance constraints, liquidity, and investment spending: cross-country evidence," Research Working Paper 94-05, Federal Reserve Bank of Kansas City.
  8. Andrew B. Abel & Olivier J. Blanchard, 1987. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
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Cited by:
  1. Schoubben, Frederiek & Van Hulle, Cynthia, 2006. "The impact of a stock listing on the determinants of firm performance," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/121061, Katholieke Universiteit Leuven.
  2. 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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