Time to Build Capital: Revisiting Investment-Cashflow Sensitivities

John Tsoukalas

Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: Is cash flow important in explaining investment dynamics? A large body of empirical work argues that it is. This finding is further taken as evidence of capital market imperfections. We argue that time-to-build for capital projects creates an investment cash flow sensitivity as found in empirical studies that may not be indicative of capital market frictions. We demonstrate this using a perfect capital markets model with firms that make investment decisions in capital projects indexed by the length of the time-to-build. We show that the typical (empirical) investment regression with q and cash flow is ridden with specification error under time-to-build investment. This error is due to an omitted right hand side state variable (current expenditure on existing capital projects) that fully describes optimal investment along with marginal q and is strongly correlated with cash flow. In addition, time aggregation error can give rise to cash flow effects independently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q.

Keywords: Investment; Capital market imperfections; Time-to-build. (search for similar items in EconPapers)
Date: 2009-05
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.nottingham.ac.uk/cfcm/documents/papers/09-05.pdf (application/pdf)

Related works:
Journal Article: Time to build capital: Revisiting investment-cash-flow sensitivities (2011)
Working Paper: Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities (2009)
Working Paper: Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:not:notcfc:09/05

Access Statistics for this paper

More papers in Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) School of Economics University of Nottingham University Park Nottingham NG7 2RD. Contact information at EDIRC.
Bibliographic data for series maintained by Hilary Hughes ().