The effects of q and cash flow on investment in the presence of measurement error

Andrew B. Abel

Journal of Financial Economics, 2018, vol. 128, issue 2, 363-377

Abstract: I analyze investment, q, and cash flow in a tractable stochastic model in which marginal q and average q are identically equal. I introduce classical measurement error and derive closed-form expressions for the coefficients in regressions of investment on q and cash flow. The cash-flow coefficient is positive and larger for faster growing firms, yet there are no financial frictions in the model. I develop the concepts of bivariate attenuation and weight shifting to interpret the estimated coefficients on q and cash flow in the presence of measurement error.

Keywords: Investment; Cash flow; q; Measurement error (search for similar items in EconPapers)
JEL-codes: E22 G3 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:128:y:2018:i:2:p:363-377

DOI: 10.1016/j.jfineco.2018.02.005

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