Investment-Cash Flow Sensitivities Are Very Probably Not Valid Measures of Financing Constraints: on the Accounting Partial Identities Problem

22 Pages Posted: 26 Mar 2019

See all articles by Javier Sánchez Vidal

Javier Sánchez Vidal

Universidad Politecnica de Cartagena - Department of Economics, Accounting and Finance

Date Written: December 1, 2018

Abstract

This experiment uses a Monte Carlo simulation designed to test whether the problems about the use of accounting identities are present in the model of Fazzari, Hubbard, and Petersen (1988). The Monte Carlo simulation creates 10,000 sets of randomly generated cash flows, Tobin’s Q, and an error term variables, which in turn shape an investments variable that depends on them. These two variables are also related through an accounting semi identity or accounting partial identity (API). OLS estimations verify that estimated coefficients do not represent reality. The closer the data are to the accounting identity, the less the regression will tell about the causal relation.

Keywords: Monte Carlo simulation, accounting identities, accounting semi-identities, accounting partial identities, investment-cash flow sensitivity

JEL Classification: G32, B4

Suggested Citation

Sánchez Vidal, Javier, Investment-Cash Flow Sensitivities Are Very Probably Not Valid Measures of Financing Constraints: on the Accounting Partial Identities Problem (December 1, 2018). Available at SSRN: https://ssrn.com/abstract=3341335 or http://dx.doi.org/10.2139/ssrn.3341335

Javier Sánchez Vidal (Contact Author)

Universidad Politecnica de Cartagena - Department of Economics, Accounting and Finance ( email )

Calle Real, 3
Cartagena, 30201
Spain

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