IDEAS home Printed from https://ideas.repec.org/p/not/notcfc/07-11.html
   My bibliography  Save this paper

Investment behavior, observable expectations, and internal funds: a comment on Cummins et al. (AER, 2006)

Author

Listed:
  • Robert E. Carpenter
  • Alessandra Guariglia

Abstract

Cummins et al. (2006) construct a new measure of fundamentals, and show that the positive cash flow effects typically found in investment-Q models disappear when traditional Q is replaced with their new measure. Their results are not robust to small changes in their specification or in the dataset used to estimate their model. The explanatory power of cash flow does not disappear when replacing traditional Q with their new measure of Q; it is never there to begin with. Investment’s lack of sensitivity to cash flow may be because their data is biased towards firms with positive cash flow (it is negative for only 242 observations of 11431). This bias and our results mute their argument that the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints.

Suggested Citation

  • Robert E. Carpenter & Alessandra Guariglia, 2007. "Investment behavior, observable expectations, and internal funds: a comment on Cummins et al. (AER, 2006)," Discussion Papers 07/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:07/11
    as

    Download full text from publisher

    File URL: https://www.nottingham.ac.uk/cfcm/documents/papers/07-11.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Timothy Erickson & Toni M. Whited, 2010. "Erratum: Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1252-1257.
    2. Vlieghe, Gertjan & Stephen Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed, 2003. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," Royal Economic Society Annual Conference 2003 212, Royal Economic Society.
    3. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 1-39, March.
    4. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
    5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 33-60.
    6. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    7. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    8. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2013. "Investment Behavior, Observable Expectations, and Internal Funds: Corrigendum," American Economic Review, American Economic Association, vol. 103(4), pages 1538-1539, June.
    9. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
    10. Somnath Das & Re‐Jin Guo & Huai Zhang, 2006. "Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms," Journal of Finance, American Finance Association, vol. 61(3), pages 1159-1185, June.
    11. Huntley Schaller, 1993. "Asymmetric Information, Liquidity Constraints and Canadian Investment," Canadian Journal of Economics, Canadian Economics Association, vol. 26(3), pages 552-574, August.
    12. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    13. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
    2. repec:zbw:rwirep:0126 is not listed on IDEAS
    3. Dirk Engel & Joel Stiebale, 2009. "Private Equity, Investment and Financial Constraints – Firm-Level Evidence for France and the United Kingdom," Ruhr Economic Papers 0126, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Ljungqvist, Alexander & Asker, John & Farre-Mensa, Joan, 2010. "Does the Stock Market Harm Investment Incentives?," CEPR Discussion Papers 7857, C.E.P.R. Discussion Papers.
    5. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    6. Laure Latruffe & Sophia Davidova & Elodie Douarin & Matthew Gorton, 2010. "Farm Expansion in Lithuania after Accession to the EU: The Role of CAP Payments in Alleviating Potential Credit Constraints," Europe-Asia Studies, Taylor & Francis Journals, vol. 62(2), pages 351-365.
    7. Dirk Engel & Joel Stiebale, 2014. "Private equity, investment and financial constraints: firm-level evidence for France and the United Kingdom," Small Business Economics, Springer, vol. 43(1), pages 197-212, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ebl:ecbull:v:5:y:2007:i:12:p:1-12 is not listed on IDEAS
    2. Coad, Alex, 2010. "Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus," Structural Change and Economic Dynamics, Elsevier, vol. 21(3), pages 206-218, August.
    3. Manzur Quader & Karl Taylor, 2018. "Corporate efficiency, credit status and investment," The European Journal of Finance, Taylor & Francis Journals, vol. 24(6), pages 439-457, April.
    4. Alfonsina Iona & Leone Leonida, 2018. "Sample separation and the sensitivity of investment to cash flow: Is the monotonicity condition empirically satisfied?," Working Papers 862, Queen Mary University of London, School of Economics and Finance.
    5. Paul Mizen & Cihan Yalcin, 2006. "Monetary Policy, Corporate Financial Composition and Real Activity," CESifo Economic Studies, CESifo Group, vol. 52(1), pages 177-213, March.
    6. Masayuki MORIKAWA, 2012. "Financial Constraints in Intangible Investments: Evidence from Japanese firms," Discussion papers 12045, Research Institute of Economy, Trade and Industry (RIETI).
    7. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
    8. Firth, Michael & Malatesta, Paul H. & Xin, Qingquan & Xu, Liping, 2012. "Corporate investment, government control, and financing channels: Evidence from China's Listed Companies," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 433-450.
    9. Vlieghe, Gertjan & Stephen Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed, 2003. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," Royal Economic Society Annual Conference 2003 212, Royal Economic Society.
    10. Guariglia, Alessandra, 2008. "Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1795-1809, September.
    11. Saira Qasim, 2021. "Financial Constraints across Pakistani Listed Firms," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(2), pages 57-69, April.
    12. Jean-Bernard Chatelain, 2003. "Structural modelling of financial constraints on investment: where do we stand?," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 2, pages 40-58, Edward Elgar Publishing.
    13. Théo Nicolas, 2019. "How Do Short-term Financial Constraints Affect SMEs Long-Term Investment: Evidence from the Working Capital Channel," Working papers 731, Banque de France.
    14. Kirch, Guilherme & Procianoy, Jairo Laser & Terra, Paulo Renato Soares, 2014. "Restrições Financeiras e a Decisão de Investimento das Firmas Brasileiras," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(1), April.
    15. repec:fgv:epgrbe:v:68:n:1:a:5 is not listed on IDEAS
    16. Laurent Soulat, 2006. "Les modèles Q-investment et les modèles d'Euler : relations de banque principale, asymétries informationnelles et modifications des structures financières des firmes de keiretsu financier," Cahiers de la Maison des Sciences Economiques bla06010, Université Panthéon-Sorbonne (Paris 1).
    17. Sevcan Yesiltas, 2009. "Financing Constraints and Investment: The Case of Turkish Manufacturing Firms," 2009 Meeting Papers 874, Society for Economic Dynamics.
    18. Alfonsina Iona & Leone Leonida, 2024. "Classes of homogeneous financing constraints and corporate investment," Working Papers 982, Queen Mary University of London, School of Economics and Finance.
    19. Chowdhury, Jaideep & Kumar, Raman & Shome, Dilip, 2016. "Investment–cash flow sensitivity under changing information asymmetry," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 28-40.
    20. Laurent Soulat, 2006. "Les modèles Q-investissement et les modèles d'Euler : relations de banque principale, asymétries informationnelles et modifications des structures financières des firmes de keiretsu financier," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00085680, HAL.
    21. Mykhayliv, Dariya & Zauner, Klaus G., 2013. "Investment behavior and ownership structures in Ukraine: Soft budget constraints, government ownership and private benefits of control," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 265-278.
    22. Rozália Pál & Roman Kozhan, 2006. "Firms' investment under financing constraints. An euro area investigation," CERS-IE WORKING PAPERS 0606, Institute of Economics, Centre for Economic and Regional Studies, revised 21 Jul 2006.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:not:notcfc:07/11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Hilary Hughes (email available below). General contact details of provider: https://edirc.repec.org/data/cfnotuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.