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Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities

John Tsoukalas

MPRA Paper from University Library of Munich, Germany

Abstract: A large body of empirical work has established the signi¯cance of cash flow in explain- ing investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, using a perfect capital markets model, that time-to-build for capital projects creates an investment cash flow sensitivity as found in empiri- cal studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-q equations under time-to-build investment. In addition, time aggregation error can give rise to cash flow effects inde- pendently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. We provide implications and recommendations for empirical work.

Keywords: Investment; Capital market imperfections; Time-to-build (search for similar items in EconPapers)
JEL-codes: E22 E32 G31 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-mac and nep-ppm
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https://mpra.ub.uni-muenchen.de/18640/1/MPRA_paper_18640.pdf original version (application/pdf)

Related works:
Journal Article: Time to build capital: Revisiting investment-cash-flow sensitivities (2011) Downloads
Working Paper: Time to Build Capital: Revisiting Investment-Cashflow Sensitivities (2009) Downloads
Working Paper: Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities (2009) Downloads
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