The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment

Gertjan Vlieghe, Stephen Bond, Alexander Klemm, Rain Newton-Smith and Murtaza Syed

No 212, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: Evidence that cash flow has a significant effect on investment after controlling for Tobin's average Q has been interpreted as suggesting the importance of financing constraints. Recent work shows that the Q model may not be identified if there are `bubbles' in stock market valuations that are persistent and correlated with fundamental values. Cash flow may then provide additional information about expected profitability that is not captured by average Q. Using data on UK companies, we find severe measurement error in average Q. We find that cash flow becomes insignificant after controlling for expected profitability using analysts' earnings forecasts (I/B/E/S).

Keywords: panel data; investment; financing constraints; Q Model; share prices (search for similar items in EconPapers)
JEL-codes: C23 E22 E44 G3 (search for similar items in EconPapers)
Date: 2003-06-04
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment (2004)
Working Paper: The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment (2004)
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