Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. We explore this hypothesis 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. This problem is particularly important in the literature that tests for an impact of financing constraints or capital market imperfections on corporate investment. Many empirical studies have added cash-flow variables to empirical models that relate investment rates to Tobin's Q, and interpreted significant coefficients on these cash-flow terms as evidence of 'excess sensitivity' of investment to the availability of internal funds. Although these findings are consistent with the presence of a cost premium for external sources of investment finance, they may also be explained, in the absence of financing constraints, by observed cash-flow or profits variables containing additional relevant information about expected future profitability not captured by Tobin's Q. Terms of use: Documents in EconStor mayRecent findings for US data suggest that much, if not all, of the significance of cash-flow variables in conventional estimates of Tobin's Q investment equations can be attributed to the failure of Tobin's Q to capture all relevant information about the expected profitability of current investment. Previous studies using UK company data have reported significant coefficients on cashflow variables, both in the context of models that relate investment to Tobin's Q, and in the context of reduced-form empirical models without explicitly forward-looking controls for expected profitability. The aim of the present study is to consider the robustness of these findings to alternative controls for expected futur...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. We explore this hypothesis 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. This problem is particularly important in the literature that tests for an impact of financing constraints or capital market imperfections on corporate investment. Many empirical studies have added cash-flow variables to empirical models that relate investment rates to Tobin's Q, and interpreted significant coefficients on these cash-flow terms as evidence of 'excess sensitivity' of investment to the availability of internal funds. Although these findings are consistent with the presence of a cost premium for external sources of investment finance, they may also be explained, in the absence of financing constraints, by observed cash-flow or profits variables containing additional relevant information about expected future profitability not captured by Tobin's Q. Terms of use: Documents in EconStor mayRecent findings for US data suggest that much, if not all, of the significance of cash-flow variables in conventional estimates of Tobin's Q investment equations can be attributed to the failure of Tobin's Q to capture all relevant information about the expected profitability of current investment. Previous studies using UK company data have reported significant coefficients on cashflow variables, both in the context of models that relate investment to Tobin's Q, and in the context of reduced-form empirical models without explicitly forward-looking controls for expected profitability. The aim of the present study is to consider the robustness of these findings to alternative controls for expected futur...