The effects of q and cash flow on investment in the presence of measurement error / by Andrew B. Abel Andrew B. Abel
Material type:
TextSeries: Journal of Financial Economics ; 128 (2)Publication details: Amsterdam Elsevier May 2018Description: Pages 363-377ISSN: - 0304-405X
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Abstract
I analyze investment, q, and cash flow in a tractable stochastic model in which marginal q and average q are identically equal. I introduce classical measurement error and derive closed-form expressions for the coefficients in regressions of investment on q and cash flow. The cash-flow coefficient is positive and larger for faster growing firms, yet there are no financial frictions in the model. I develop the concepts of bivariate attenuation and weight shifting to interpret the estimated coefficients on q and cash flow in the presence of measurement error.
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