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How Q and Cash Flow A ff ect Investment without Frictions : An Analytic Explanation 1
| Content Provider | Semantic Scholar |
|---|---|
| Copyright Year | 2008 |
| Abstract | We derive a closed-form solution for Tobin's Q in a stochastic dynamic framework. We show analytically that investment is positively related to Tobin's Q and cash flow, even in the absence of adjustment costs or financing frictions. Both Q and investment move in the same direction as expected revenue growth, so changes in expected revenue growth induce Q and investment to comove positively. Similarly, shocks to current cash flow, arising from shocks to the user cost of capital in our model, cause investment and cash flow per unit of capital to comove positively. Furthermore, we show that this alternative mechanism for the relationship among investment, Q, and cash flow delivers larger cash flow effects for smallerand fastergrowing firms, as observed in the data. Moreover, the empirically small sensitivity of investment to Tobin's Q does not imply implausibly large adjustment costs in our model (since there are no adjustment costs). Calibrating the model generates values of Q similar to those in the data; investment is more sensitive to cash flow than it is to Q, and both responses are of empirically plausible magnitudes. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://finance.wharton.upenn.edu/~abel/pdf_files_papers/nofrictions_i_q_c_2.pdf |
| Alternate Webpage(s) | http://finance.wharton.upenn.edu/~abel/pdf_files_papers/NoFrictions_I_Q_c_5.pdf |
| Alternate Webpage(s) | http://www.usc.edu/schools/business/FBE/seminars/papers/M_9-12-08_ABEL-nofrictions.pdf |
| Alternate Webpage(s) | https://repository.upenn.edu/cgi/viewcontent.cgi?article=1275&context=fnce_papers |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Ectomesenchymal Chondromyxoid Tumor Funding Large Shock |
| Content Type | Text |
| Resource Type | Article |
