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The Analytics of Investment, q, and Cash Flow

Andrew Abel ()

No 21549, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper I analyze the relationships among investment, q, and cash flow in a tractable stochastic model in which marginal q and average q are identically equal. After analyzing the impact of changes in the distribution of the marginal operating profit of capital, I extend the model to include measurement error and analyze the cash-flow coefficient in regressions of investment on q and cash flow. In empirical studies, the estimated cash-flow coefficient is generally positive and larger for rapidly growing firms. Such findings are typically interpreted as evidence of financial frictions facing firms. I derive closed-form expressions for the cash-flow coefficient that are positive and larger for faster growing firms, yet there are no financial frictions in the model.

JEL-codes: D21 E22 G31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-mac
Date: 2015-09
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