Time to build capital: Revisiting investment-cash-flow sensitivities

John Tsoukalas

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 7, 1000-1016

Abstract: A large body of empirical work has established the significance of cash flow in explaining 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 empirical 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 independently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. Evidence from a large panel of U.K. manufacturing firms confirms the validity of the time-to-build investment channel.

Keywords: Investment; Capital; market; imperfections; Time-to-build (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Time to Build Capital: Revisiting Investment-Cashflow Sensitivities (2009)
Working Paper: Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities (2009)
Working Paper: Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:7:p:1000-1016

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