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Investment-Cash Flow Sensitivity: Fact or Fiction?Senay AgcaGeorge Washington University - School of Business, Department of Finance Abon MozumdarVirginia Polytechnic Institute & State University - Department of Finance March 16, 2012 Abstract: 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, G32 working papers seriesDate posted: October 23, 2010 ; Last revised: March 19, 2012Suggested CitationContact Information
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