Investment Cash Flow Sensitivity: Fact or Fiction?

Agca, Senay; Mozumdar, Abon

doi:10.2139/ssrn.1695972

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Investment Cash Flow Sensitivity: Fact or Fiction?

55 Pages Posted: 23 Oct 2010 Last revised: 7 Nov 2015

See all articles by Senay Agca

Senay Agca

George Washington University - School of Business, Department of Finance

Abon Mozumdar

Virginia Polytechnic Institute & State University - Department of Finance

Date Written: November 6, 2015

Abstract

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

Agca, Senay and Mozumdar, Abon, Investment Cash Flow Sensitivity: Fact or Fiction? (November 6, 2015). Available at SSRN: https://ssrn.com/abstract=1695972 or http://dx.doi.org/10.2139/ssrn.1695972