Investment, Tobin’s Q, and Cash Flow Across Time and Frequencies

Abstract

The investment literature has long acknowledged the time- and frequency-varying dynamics of the relationship between investment, Tobin's Q and cash flow. In this paper, we use continuous wavelet tools to estimate and assess the relationship between these variables simultaneously at different frequencies and over time. We find that i) Q and cash flow are complementary sources of information for investment, the former being more important for firms' investment decisions in the medium-to-long run and the latter at business cycles frequencies; and ii) investment-Q sensitivity declines over time at all frequencies, while investment-cash flow sensitivity declines at business cycles frequencies but remains largely stable over the medium-to-long run.

Keywords: investment, Tobin's Q, cash flow, time-frequency estimation, continuous wavelets

JEL Classification: C49, E22, G31