Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-06T11:08:56.917Z Has data issue: false hasContentIssue false
  • English
  • Français

Investment–Cash Flow Sensitivity: Fact or Fiction?

Published online by Cambridge University Press:  24 May 2017

Şenay Ağca  and
Abon Mozumdar
Get access Rights & Permissions [Opens in a new window]

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 q measure. 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 generalized method of moments estimators yield empirically well-specified models.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 3 , June 2017 , pp. 1111 - 1141
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We are grateful to Jason Cummins, Kevin Hassett, Stephen Oliner, and Toni Whited for making available their data and programs through their Web sites and personal correspondence. For helpful comments and suggestions, we thank Meghana Ayyagari, Mike Cliff, Antonio Galvao (the referee), Paul Malatesta (the editor), Stephen Oliner, N. R. Prabhala, Fabio Schiantarelli, Refik Soyer, Toni Whited, and seminar participants at George Washington University and Virginia Tech. This paper is dedicated to the family of Abon Mozumdar.

References

Ağca, Ş., and Mozumdar, A.. “The Impact of Capital Market Imperfections on the Investment–Cash Flow Sensitivity.” Journal of Banking and Finance, 32 (2008), 207–216.Google Scholar
Allayannis, G., and Mozumdar, A.. “The Impact of Negative Cash Flow and Influential Observations on Investment–Cash Flow Sensitivity Estimates.” Journal of Banking and Finance, 28 (2004), 901–930.CrossRefGoogle Scholar
Almeida, H., and Campello, M.. “Financial Constraints, Asset Tangibility, and Corporate Investment.” Review of Financial Studies, 20 (2007), 1429–1460.Google Scholar
Almeida, H.; Campello, M.; and Galvao, A. F.. “Measurement Errors in Investment Equations.” Review of Financial Studies, 23 (2010), 3279–3328.Google Scholar
Almeida, H.; Campello, M.; and Galvao, A. F.. “More on the Performance of Higher-Order Moment Estimators in Investment Equations.” Working Paper, University of Illinois (2011).CrossRefGoogle Scholar
Almeida, H.; Campello, M.; and Weisbach, M. S.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 1777–1804.Google Scholar
Amemiya, Y.“Instrumental Variable Estimator for the Nonlinear Errors-in-Variables Model.” Journal of Econometrics, 28 (1985), 273–290.CrossRefGoogle Scholar
Anderson, T. W., and Hsiao, C.. “Estimation of Dynamic Models with Error Components.” Journal of the American Statistical Association, 76 (1981), 598–606.CrossRefGoogle Scholar
Arellano, M., and Bond, S. R.. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies, 58 (1991), 277–297.Google Scholar
Arellano, M., and Bond, S. R.. “Dynamic Panel Data Estimation Using DPD98 for Gauss: A Guide for Users.” Working Paper, Oxford University and CEMFI (1998).Google Scholar
Blanchard, O. J.; Lopez-de-Silanes, F.; and Shleifer, A.. “What Do Firms Do with Cash Windfalls?” Journal of Financial Economics, 36 (1994), 337–360.Google Scholar
Blundell, R.; Bond, S.; Devereux, M.; and Schiantarelli, F.. “Investment and Tobin’s Q: Evidence from Company Panel Data.” Journal of Econometrics, 51 (1992), 233–257.CrossRefGoogle Scholar
Bond, S. R., and Cummins, J. G.. “The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions.” Brookings Papers on Economic Activity, 31 (2000), 61–124.Google Scholar
Brown, J. R.; Fazzari, S. M.; and Petersen, B. C.. “Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom.” Journal of Finance, 64 (2009), 151–185.Google Scholar
Brown, J. R., and Petersen, B. C.. “Why Has the Investment–Cash Flow Sensitivity Declined So Sharply? Rising R&D and Equity Market Developments.” Journal of Banking and Finance, 33 (2009), 971–984.Google Scholar
Chen, H., and Chen, S.. “Investment–Cash Flow Sensitivity Cannot Be a Good Measure of Financial Constraints: Evidence from the Time Series.” Journal of Financial Economic, 103 (2012), 393–410.Google Scholar
Cleary, S.“The Relationship between Firm Investment and Financial Status.” Journal of Finance, 54 (1999), 673–692.Google Scholar
Cummins, J. G.; Hassett, K. A.; and Oliner, S. D.. “Investment Behavior, Observable Expectations, and Internal Funds.” American Economic Review, 96 (2006), 796–810.Google Scholar
Cummins, J. G.; Hassett, K. A.; and Oliner, S. D.. “Investment Behavior, Observable Expectations, and Internal Funds: Corrigendum.” American Economic Review, 103 (2013), 1538–1539.Google Scholar
Erickson, T., and Whited, T. M.. “Measurement Error and the Relationship between Investment and q .” Journal of Political Economy, 108 (2000), 1027–1057.Google Scholar
Erickson, T., and Whited, T. M.. “Two-Step GMM Estimation of the Errors-in-Variables Model Using High-Order Moments.” Econometric Theory, 18 (2002), 776–799.Google Scholar
Erickson, T., and Whited, T. M.. “On the Accuracy of Different Measures of q .” Financial Management, 35 (2006), 5–33.CrossRefGoogle Scholar
Erickson, T., and Whited, T. M.. “Erratum: Measurement Error and the Relationship between Investment and q .” Journal of Political Economy, 118 (2010), 1252–1257.Google Scholar
Erickson, T., and Whited, T. M.. “Treating Measurement Error in Tobin’s q .” Review of Financial Studies, 4 (2012), 1286–1329.Google Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Faulkender, M., and Petersen, M.. “Investment and Capital Constraints: Repatriations under the American Jobs Creation Act.” Review of Financial Studies, 25 (2012), 3351–3388.Google Scholar
Fazzari, S. M.; Hubbard, R. G.; and Petersen, B. C.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1 (1988), 141–195.CrossRefGoogle Scholar
Fee, C. E.; Hadlock, C. J.; and Pierce, J. R.. “Investment, Financing Constraints, and Internal Capital Markets: Evidence from the Advertising Expenditures of Multinational Firms.” Review of Financial Studies, 22 (2009), 2361–2392.CrossRefGoogle Scholar
Greene, W. H. Econometric Analysis. 5th ed. Upper Saddle River, NJ: Prentice Hall (2003).Google Scholar
Hadi, A. S.“Identifying Multiple Outliers in Multivariate Data.” Journal of the Royal Statistical Society, Series B, 54 (1992), 761–771.Google Scholar
Hadi, A. S.“A Modification of a Method for the Detection of Outliers in Multivariate Samples.” Journal of the Royal Statistical Society, Series B, 56 (1994), 393–396.Google Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Hansen, L. P.“Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 1029–1054.Google Scholar
Hausman, J.; Newey, W.; Ichimura, H.; and Powell, J.. “Measurement Errors in Polynomial Regression Models.” Journal of Econometrics, 50 (1991), 273–295.Google Scholar
Holtz-Eakin, D.; Newey, W.; and Rosen, H. S.. “Estimating Vector Autoregressions with Panel Data.” Econometrica, 56 (1988), 1371–1395.Google Scholar
Hsiao, C.“Consistent Estimation for Some Nonlinear Errors-in-Variables Models.” Journal of Econometrics, 41 (1989), 159–185.Google Scholar
Kaplan, S., and Zingales, L.. “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?” Quarterly Journal of Economics, 112 (1997), 169–215.Google Scholar
Lamont, O.“Cash Flow and Investment: Evidence from Internal Capital Markets.” Journal of Finance, 52 (1997), 83–109.Google Scholar
Lewellen, J., and Lewellen, K.. “Investment and Cash Flow: New Evidence.” Journal of Financial and Quantitative Analysis, 51 (2016), 1135–1164.Google Scholar
Li, T.“Robust and Consistent Estimation of Nonlinear Errors-in-Variables Models.” Journal of Econometrics, 110 (2002), 1–26.CrossRefGoogle Scholar
Love, I.“Financial Development and Financing Constraints: International Evidence from the Structural Investment Model.” Review of Financial Studies, 16 (2003), 765–791.Google Scholar
Lubotsky, D., and Wittenberg, M.. “Interpretation of Regressions with Multiple Proxies.” Review of Economics and Statistics, 88 (2006), 549–562.CrossRefGoogle Scholar
McLean, R. D.; Zhang, T.; and Zhao, M.. “Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth.” Journal of Finance, 67 (2012), 313–350.CrossRefGoogle Scholar
Moshirian, F.; Nanda, V. K.; Vadilyev, A.; and Zhang, B.. “What Drives Investment–Cash Flow Sensitivity around the World?” Working Paper, Rutgers University (2014).Google Scholar
Newey, W., and McFadden, D.. “Large Sample Estimation and Hypothesis Testing.” In Handbook of Econometrics, Vol. 4. Engle, R. and McFadden, D., eds. Amsterdam: Elsevier (1994), 2113–2245.Google Scholar
Polk, C. K., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.Google Scholar
Poterba, J. M.“Comment on ‘Financing Constraints and Corporate Investment.”’ Brookings Papers on Economic Activity, 1 (1988), 200–204.Google Scholar
Rauh, J. D.“Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans.” Journal of Finance, 61 (2006), 33–71.Google Scholar
Report to the Congress on Depreciation Recovery Periods and Methods. Department of the Treasury (July 2000).Google Scholar
Sargan, J. D.“The Estimation of Economic Relationships Using Instrumental Variables.” Econometrica, 26 (1958), 393–415.Google Scholar
Schennach, S. M.“Estimation of Nonlinear Models with Measurement Error.” Econometrica, 72 (2004), 33–75.Google Scholar
Stein, J.“Agency, Information, and Corporate Investment.” In Handbook of the Economics of Finance, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, The Netherlands: Elsevier, North Holland (2003).Google Scholar
Whited, T. M.“Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data.” Journal of Finance, 47 (1992), 1425–1460.Google Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar
Supplementary material: File

Ağca and Mozumdar supplementary material

Ağca and Mozumdar supplementary material 1

Download Ağca and Mozumdar supplementary material(File)
File 227.3 KB