Investment and Cash Flow: New Evidence
40 Pages Posted: 16 Mar 2010 Last revised: 18 Oct 2014
Date Written: August 29, 2014
We study the investment-cashflow sensitivities of U.S. firms from 1971–2009. Our tests extend the literature in several key ways and provide strong evidence that cashflow explains investment beyond its correlation with q. In simple OLS regressions, a dollar of current- and prior-year cashflow is associated with $0.53 of additional investment for firms that are the least likely to be constrained and $0.67 for firms that are the most likely to be constrained. Investment-cashflow sensitivities for the two groups drop to a conservatively estimated but still significant 0.32 and 0.63, respectively, after correcting for measurement error in M/B. Our results suggest that financing constraints and free cashflow problems are important for investment decisions.
Keywords: Investment, cash flow, q-theory
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