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Q, Cash Flow and Investment: An Econometric Critique

  • Christopher F. Baum

    ()

    (Boston College)

  • Clifford F. Thies

    ()

    (Shenandoah University)

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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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
Contact details of provider: Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
Web page: http://fmwww.bc.edu/EC/
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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. 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.
  4. 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.
  5. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  6. 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.
  7. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  8. Robert S. Chirinko, 1994. "Finance constraints, liquidity, and investment spending: cross-country evidence," Research Working Paper 94-05, Federal Reserve Bank of Kansas City.
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