NDLI: The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment

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The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment

Content Provider	Library of Congress - Books/Printed Material
Author	Bond, Stephen
Temporal Coverage	2004
Copyright Year	2004
Abstract	"Evidence that cash flow has a significant effect on company investment spending, after controlling for Tobin's average Q, has often been interpreted as suggesting the importance of financing constraints. Recent work on measurement error in the Q model casts doubt on this interpretation. It is possible that the Q model may not be identified if there are 'bubbles' in stock market valuations that are both persistent over time and that are correlated with fundamental values. Cash flow may then provide additional information about expected profitability that is not captured by a poorly measured Tobin's average Q variable. This hypothesis is explored empirically using UK panel data on companies for which analysts' earnings forecasts are available from the IBES database. The results point to a severe measurement error in average Q. The paper finds that, controlling for expected profitability using analysts' earnings forecasts, cash flow becomes insignificant. Both sales growth and cash-stock variables do provide additional information, which could either be capturing expectations of profitability at longer horizons, or reflect misspecification of the basic Q model. Results for subsamples do not suggest financing constraints as a likely explanation for these findings. Technical Appendix 1 to accompany Working Paper no. 222 Full text (224k)Technical Appendix 2 to accompany Working Paper no. 222 Full text (228k)"--Bank of England web site.
Language	English
Publisher	Bank of England
Publisher Place	London
Part of Series	Catalog
Requires	HTML5 supported browser
Access Restriction	Open
Subject Keyword	Capital Investments Cash Flow Econometric Models
Subject Domain (in LCSH)	Capital investments--Econometric models
Subject Domain (in LCSH)	Cash flow--Econometric models
Subject Domain (in LCC)	HG186.G7
Content Type	Text
Resource Type	Book

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