Discussion of “Overinvestment of free cash flow”

Daniel Bergstresser ()
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Daniel Bergstresser: Harvard Business School

Review of Accounting Studies, 2006, vol. 11, issue 2, No 3, 202 pages

Abstract: Abstract Richardson’s paper is a useful addition to the literature on the relationship between cash flow and investment. His approach to estimating this relationship is a new twist on earlier approaches. Like most of this literature, Richardson finds evidence that firms’ investment decisions are excessively sensitive to current cash flow, suggesting that violations of the Modigliani–Miller assumptions are empirically important. My view is that conceptual and implementation problems beset Richardson’s attempt to identify the specific violation of the Modigliani–Miller assumptions, and his evidence on this second point is not convincing.

Keywords: Investment; Cash flow; Modigliani-Miller theorem; Corporate governance (search for similar items in EconPapers)
JEL-codes: G31 (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s11142-006-9002-3

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