TY - JOUR
AU - Kraft,Holger
AU - Schwartz,Eduardo S.
TI - Cash Flow Multipliers and Optimal Investment Decisions
JF - National Bureau of Economic Research Working Paper Series
VL - No. 15807
PY - 2010
Y2 - March 2010
DO - 10.3386/w15807
UR - http://www.nber.org/papers/w15807
L1 - http://www.nber.org/papers/w15807.pdf
N1 - Author contact info:
Holger Kraft
Goethe University
Grueneburgplatz 1
65323 Frankfurt am Main
Germany
E-Mail: holgerkaft@finance.uni-frankfurt.de
Eduardo S. Schwartz
Anderson Graduate School of Management
UCLA
110 Westwood Plaza
Los Angeles, CA 90095
Tel: 310/825-2873
Fax: 310/825-6384
E-Mail: eduardo.schwartz@anderson.ucla.edu
AB - By postulating a simple stochastic process for the firm's cash flows in which the drift and the variance of the process depend on the investment policy of the firm, we develop a theoretical model, determine the optimal investment policy and, given this policy, calculate the ratio of the current value of the firm and the current cash flow which we call the "cash flow multiplier''. The main contribution of the paper, however, is empirical. Using a very extensive data set comprised of more than 13,000 fims over 44 years we examine the determinants of the cash flow multiplier using as explanatory variables macro and firm specific variables suggested by the theoretical model. We find strong support for the variables suggested by the model. Perhaps the most interesting aspect of the paper is the formulation of a parsimonious empirical asset pricing model, based on the fundamental discounted cash flow approach but using current macroeconomic variables and firm specific variables easily observable for its implementation. We obtain valuation equations that could potentially form part of a new valuation framework which does not require estimating future cash flows nor risk adjusted discount rates.
ER -