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Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities

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  • Tsoukalas, John

Abstract

A large body of empirical work has established the signi¯cance of cash flow in explain- ing investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, using a perfect capital markets model, that time-to-build for capital projects creates an investment cash flow sensitivity as found in empiri- cal studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-q equations under time-to-build investment. In addition, time aggregation error can give rise to cash flow effects inde- pendently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. We provide implications and recommendations for empirical work.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18640.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:18640

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Keywords: Investment; Capital market imperfections; Time-to-build;

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Cited by:
  1. Giorgio Fabbri & Salvatore Federico, 2014. "On the infinite-dimensional representation of stochastic controlled systems with delayed control in the diffusion term," Working Papers hal-01038088, HAL.
  2. Emami Namini, Julian, 2014. "The short and long-run impact of globalization if firms differ in factor input ratios," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 38(C), pages 37-64.

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