Tsoukalas, John (2009): Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities.
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A large body of empirical work has established the significance 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:||18. Oct 2010 18:18|
|Last Modified:||12. Feb 2013 18:21|
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