Investment Cash Flow Sensitivity: Fact or Fiction?
55 Pages Posted: 23 Oct 2010 Last revised: 7 Nov 2015
Date Written: November 6, 2015
We examine whether internal funds matter for investment when the measurement error in q is addressed. By carefully employing methodologies that tackle the measurement error in q, we show that cash flow is a significant determinant of investment. We also find that an analyst forecast based q measure is not superior to a stock market based one. We further propose an approach that uses two alternative proxies of q as instruments for addressing measurement error. Our evidence indicates that instrumental variables type GMM estimators yield empirically well specified models.
Keywords: Investment, internal funds, measurement error, financial econometrics
JEL Classification: G14, G31, G32
Suggested Citation: Suggested Citation