Tsoukalas, John (2009): Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities.
Download (306Kb) | Preview
A large body of empirical work has established the signi¯cance of cash flow in explain- ing investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, using a perfect capital markets model, that time-to-build for capital projects creates an investment cash flow sensitivity as found in empiri- cal studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-q equations under time-to-build investment. In addition, time aggregation error can give rise to cash flow effects inde- pendently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. We provide implications and recommendations for empirical work.
|Item Type:||MPRA Paper|
|Original Title:||Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities|
|Keywords:||Investment; Capital market imperfections; Time-to-build|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment; Capacity
|Depositing User:||John Tsoukalas|
|Date Deposited:||16. Nov 2009 15:09|
|Last Modified:||13. Feb 2013 22:52|
Abel, A. and Blanchard, O.: 1986, Investment and sales: Some empirical evidence, NBER working paper 2050.
Alti, A.: 2003, How sensitive is investment to cash °ow when financing is frictioneless?, Journal of Finance 108.
Barnett, S. and Sakellaris, P.: 1999, A new look at ¯rm market value investment and adjustment costs, Review of Economics and Statistics 81.
Basu, S. and Fernald, J.: 1997, Returns to scale in U.S. production: Estimates and implications, Journal of Political Economy 105.
Bond, S. and Meghir, C.: 1994, Dynamic investment models and the firm's financial policy, The Review of Economic Studies 61.
Carpenter, R., Fazzari, S. and Petersen, B.: 1994, Inventory investment, internal finance fluctuations and the business cycle, Brokings Papers on Economic Activity.
Carpenter, R., Fazzari, S. and Petersen, B.: 1998, Financing constraints and inventory invest- ment: A comparative study with high-frequency panel data, Review of Economics and Statistics 80.
Chirinko, R.: 1993, Business fixed investment spending: Modeling strategies, empirical results, and policy implications, Journal of Economic Literature 31.
Christiano, L. and Todd, R.: 1996, Time to plan and aggregate fluctuations, Federal Reserve Bank of Minneapolis Quarterly Review Winter.