NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Analytics of Investment, q, and Cash Flow

Andrew B. Abel

NBER Working Paper No. 21549
Issued in September 2015
NBER Program(s):   CF   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w21549

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