Working Paper: NBER ID: w21549
Authors: Andrew B. Abel
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.
Keywords: Investment; Q; Cash Flow
JEL Codes: D21; E22; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow (E50) | investment (G31) |
| cash flow (E50) | cash flow coefficient (G31) |
| q (Y60) | cash flow coefficient (G31) |
| measurement error in q (C20) | cash flow coefficient (G31) |
| growth rate (O40) | cash flow coefficient (G31) |
| cash flow coefficient (G31) | financial constraints (H60) |