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

Tsoukalas, J.D. (2011) Time to build capital: revisiting investment-cash-flow sensitivities. Journal of Economic Dynamics and Control, 35(7), pp. 1000-1016. (doi:10.1016/j.jedc.2010.12.009)

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Publisher's URL: http://dx.doi.org/10.1016/j.jedc.2010.12.009

Abstract

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. Evidence from a large panel of U.K. manufacturing firms confirms the validity of the time-to-build investment channel.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Tsoukalas, Professor John
Authors: Tsoukalas, J.D.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Economic Dynamics and Control
ISSN:0165-1889
Published Online:17 December 2010

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