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The Analytics of Investment, q, and Cash Flow

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  • Andrew B. Abel

Abstract

In this paper I analyze the relationships among investment, q, and cash flow in a tractable stochastic model in which marginal q and average q are identically equal. After analyzing the impact of changes in the distribution of the marginal operating profit of capital, I extend the model to include measurement error and analyze the cash-flow coefficient in regressions of investment on q and cash flow. In empirical studies, the estimated cash-flow coefficient is generally positive and larger for rapidly growing firms. Such findings are typically interpreted as evidence of financial frictions facing firms. I derive closed-form expressions for the cash-flow coefficient that are positive and larger for faster growing firms, yet there are no financial frictions in the model.

Suggested Citation

  • Andrew B. Abel, 2015. "The Analytics of Investment, q, and Cash Flow," NBER Working Papers 21549, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21549
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    References listed on IDEAS

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    Cited by:

    1. Russell E. Triplett & Nilufer Ozdemir & Paul M. Mason, 2022. "Structural Change in the Investment Function," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 220-236, January.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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