Investment-Cash Flow Sensitivity: Fact or Fiction?
George Washington University - School of Business, Department of Finance
Virginia Polytechnic Institute & State University - Department of Finance
March 16, 2012
We examine whether internal funds matter for investment when measurement errors in q are addressed. Through a detailed analysis of the studies that tackle measurement errors in q, we show that cash flow cannot be dismissed as an artifact of these errors. We also find that an analyst forecast based q measure is not superior to a stock market based one. Our findings indicate that while investment-cash flow sensitivities decline through time, they do not disappear during the recent financial crisis. We also propose a methodology that uses two alternative proxies of q as instruments in addressing these measurement errors.
Number of Pages in PDF File: 49
Keywords: Investment, internal funds, measurement error, financial econometrics
JEL Classification: G14, G31, G32working papers series
Date posted: October 23, 2010 ; Last revised: March 19, 2012
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