Investment and Value: A Neoclassical Benchmark

Eberly, Janice; Rebelo, Sérgio; Vincent, Nicolas

doi:10.3386/w13866

Cited by 105 publications

(91 citation statements)

References 19 publications

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“…The specification error we identify and renders q an insufficient summary statistic is the primary driver of cash flow effects in our simulated investment-q regressions. Our results closely corroborate findings recently reported in Eberly et al (2008) although (as explained below), in contrast to theirs, our findings are free of measurement error in q. Nevertheless as we demonstrate, measurement error magnifies the specification error we identify.…”

Section: Introductionsupporting

confidence: 81%

“…Thus the inclusion of this proxy adequately controls for the omitted state variable. 16 In comparing different investment models, Eberly et al (2008) report empirical results from a Compustat panel of firms and results from a simulated panel of firms that are consistent with the findings from Table 7. Specifically when they add the lagged investment rate in the investment-q regression the latter dominates, and cash flow explains very little of the remaining variation (see Table 2, p.36).…”

Section: Implications For Empirical Worksupporting

confidence: 71%

“…In our study-as in Eberly et al (2008)-we show that the lagged investment rate is an important determinant of current investment because it proxies for an omitted state variable. In Eberly et al (2008) simulations, lagged investment proxies for a regime-switching component in a firms' demand schedule. In the present model with time-to-build, lagged investment has a different structural interpretation, capturing time-to-build effects for the construction of capital.…”

Section: Introductionmentioning

confidence: 97%

“…The importance of lagged investment effects is a largely overlooked empirical regularity, since most of empirical work focuses almost exclusively on the role of cash flow. But as Eberly et al (2008) note: "Both cash-flow and lagged-investment effects have been found in virtually every investment regression specification and data sample." In our study-as in Eberly et al (2008)-we show that the lagged investment rate is an important determinant of current investment because it proxies for an omitted state variable.…”

Section: Introductionmentioning

confidence: 99%

“…But as Eberly et al (2008) note: "Both cash-flow and lagged-investment effects have been found in virtually every investment regression specification and data sample." In our study-as in Eberly et al (2008)-we show that the lagged investment rate is an important determinant of current investment because it proxies for an omitted state variable. In Eberly et al (2008) simulations, lagged investment proxies for a regime-switching component in a firms' demand schedule.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Time to build capital: Revisiting investment-cash-flow sensitivities

Tsoukalas

2011

Journal of Economic Dynamics and Control

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A large body of empirical work has established the significance of cash flow in explaining investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, using a perfect capital markets model, that time-to-build for capital projects creates an investment cash flow sensitivity as found in empirical studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-q equations under time-to-build investment. In addition, time aggregation error can give rise to cash flow effects independently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in q. We provide implications and recommendations for empirical work.JEL classification: D21; E22; E32; G31.

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Section: Introductionsupporting

confidence: 81%

Section: Implications For Empirical Worksupporting

confidence: 71%

Section: Introductionmentioning

confidence: 97%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Time to build capital: Revisiting investment-cash-flow sensitivities

Tsoukalas

2011

Journal of Economic Dynamics and Control

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The interaction of risk management tools: Financial hedging, corporate diversification and liquidity

Jiang

Feng

2020

Int. J Fin Econ

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What kind of firm benefits more from financial hedging, the focused or diversified? In fact, the benefit of financial hedging depends on diversification policies. By analyzing the interaction between financial hedging and corporate diversification in a theoretical model for a financially constrained firm, we find that focused firms have relatively higher marginal value of hedging in general static environment. However, dynamic analysis results show that an important synergy between financial hedging and diversification would reverse this result. Exercising corporate diversification policies has direct negative effect on liquidity and operating risk, thereby increasing the marginal value of financial hedging. As a result, it is possible that their relationship is complementary in a dynamic environment since these tools increase firm value in different channels. This suggests that firms could use financial hedging in the process of diversification if it is possible. Our findings also emphasize the importance of risk management capabilities which is hardly observable but contributes much to firm value.

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Macro‐management policies: A supporting role to company' capital expenditure

Zehri

2022

Int. J Fin Econ

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This article studies the empirical impact of Foreign Assets Management (FAM) on companies' capital expenditure in emerging market economies with International Financial Shocks (IFS). The empirical analysis uses annual data of 2931 publicly listed companies in 45 emerging market economies from 2000 to 2019. We analyzed a multiplicative regression of a canonical capital expenditure Q model. The findings show that FAM positively affects companies' capital expenditure. Moreover, financially restricted companies are more sensitive to the favourable impact of FAM compared to restricted companies. Our results highlight the relevance of considering companies' heterogeneity when examining the effect of macro‐management policies. In addition, FAM has a more favourable impact on companies' capital expenditure in economies that concurrently use capital controls and macroprudential policy. Finally, our findings suggest that successful macro‐management policies insulate capital expenditure from adverse IFS. This result highlights the role of more coordinated approaches to repel adverse international shocks.

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Investment and Value: A Neoclassical Benchmark

Cited by 105 publications

References 19 publications

Time to build capital: Revisiting investment-cash-flow sensitivities

Time to build capital: Revisiting investment-cash-flow sensitivities

The interaction of risk management tools: Financial hedging, corporate diversification and liquidity

Macro‐management policies: A supporting role to company' capital expenditure

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