Concentrating on Q and Cash Flow

40 Pages Posted: 3 Feb 2017

See all articles by Gustavo Grullon

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

John Hund

University of Georgia

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Date Written: January 19, 2017

Abstract

Investment spending by US public firms is highly concentrated. The 100 largest spenders account for 60% of total capital expenditures and drive most of the variation in aggregate US investment. This high concentration creates a disconnect between the average public firm and macroeconomic aggregates. For large firms, cash flow remains the primary driver of investment spending and has not declined in importance as it has for smaller public firms. The cash flowing to big spenders provides a better forecast of future investment opportunities than noisy proxies for Tobin’s q even though these firms are not financially constrained. Our results are inconsistent with recent models that predict higher investment-cash flow sensitivity for small young growth firms and suggest that cash flow is still the most important determinant of macroeconomic fluctuations in investment spending.

Keywords: Aggregate Investment, Q-Theory, Cashflow, Accelerator

JEL Classification: G32, G34

Suggested Citation

Grullon, Gustavo and Hund, John and Weston, James Peter, Concentrating on Q and Cash Flow (January 19, 2017). Available at SSRN: https://ssrn.com/abstract=2910114 or http://dx.doi.org/10.2139/ssrn.2910114

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

John Hund (Contact Author)

University of Georgia ( email )

Athens, GA 30602
United States

James Peter Weston

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

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