Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098897 | Journal of Economic Dynamics and Control | 2011 | 17 Pages |
Abstract
A large body of empirical work has established the significance of cash flow in explaining 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 empirical 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 independently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. Evidence from a large panel of U.K. manufacturing firms confirms the validity of the time-to-build investment channel.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
John D. Tsoukalas,