Q, Cash Flow and Investment: An Econometric Critique

Christopher Baum and Clifford Thies ()

Review of Quantitative Finance and Accounting, 1999, vol. 12, issue 1, 35-47

Abstract: The effects of measurement and specification error on estimates of the Q and cash flow model of investment are investigated. Two sources of error are considered: expensing of R&D expenditures and failing to identify that component of cash flow which relaxes financing constraints. We apply random-effects and instrumental variables estimators to a model that addresses these sources of error. We find that: (1) the capitalization of R&D strengthens the explanatory power of the model; (2) expected and unexpected components of cash flow have different effects; and (3) the effects of Q are much more evident in firms facing low costs of external finance. Copyright 1999 by Kluwer Academic Publishers

Date: 1999
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Working Paper: Q, Cash Flow and Investment: An Econometric Critique (1996)
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