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Discussion of “Overinvestment of free cash flow”

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  • Daniel Bergstresser

    (Harvard Business School)

Abstract

Richardson’s paper is a useful addition to the literature on the relationship between cash flow and investment. His approach to estimating this relationship is a new twist on earlier approaches. Like most of this literature, Richardson finds evidence that firms’ investment decisions are excessively sensitive to current cash flow, suggesting that violations of the Modigliani–Miller assumptions are empirically important. My view is that conceptual and implementation problems beset Richardson’s attempt to identify the specific violation of the Modigliani–Miller assumptions, and his evidence on this second point is not convincing.

Suggested Citation

  • Daniel Bergstresser, 2006. "Discussion of “Overinvestment of free cash flow”," Review of Accounting Studies, Springer, vol. 11(2), pages 191-202, September.
    • Handle: RePEc:spr:reaccs:v:11:y:2006:i:2:d:10.1007_s11142-006-9002-3
    DOI: 10.1007/s11142-006-9002-3
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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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