Investment and Cash Flow: New Evidence

40 Pages Posted: 16 Mar 2010 Last revised: 18 Oct 2014

See all articles by Jonathan Lewellen

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Katharina Lewellen

Dartmouth College - Tuck School of Business

Date Written: August 29, 2014

Abstract

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

Suggested Citation

Lewellen, Jonathan W. and Lewellen, Katharina, Investment and Cash Flow: New Evidence (August 29, 2014). Tuck School of Business Working Paper No. 2010-77. Available at SSRN: https://ssrn.com/abstract=1570640 or http://dx.doi.org/10.2139/ssrn.1570640

Jonathan W. Lewellen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Katharina Lewellen

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
406
Abstract Views
1,829
rank
75,662
PlumX Metrics