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Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities

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  • Tsoukalas, John

Abstract

A large body of empirical work has established the significance of cash flow in explain- ing 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 empiri- cal 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 inde- pendently 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.

Suggested Citation

  • Tsoukalas, John, 2009. "Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities," MPRA Paper 25870, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:25870
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    2. Nusrat Jahan, 2020. "Does Asset Durability Impede Financing? An Empirical Assessment," Carleton Economic Papers 20-17, Carleton University, Department of Economics, revised 07 Aug 2022.
    3. Hansen, Erwin & Wagner, Rodrigo, 2017. "Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 197-212.
    4. Kim, Kirak, 2020. "Inventory, fixed capital, and the cross-section of corporate investment," Journal of Corporate Finance, Elsevier, vol. 60(C).
    5. Frédéric Zumer & Jacques Le Cacheux & Marc Flandreau, 1998. "Stability without a pact? Lessons from the European Gold Standard, 1880-1913," Sciences Po publications n°98-01, Sciences Po.
    6. Julian Emami Namini, 2009. "International Trade with Firm Heterogeneity in Factor Shares," Tinbergen Institute Discussion Papers 09-020/1, Tinbergen Institute.
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    8. William Lefebvre & Enzo Miller, 2021. "Linear-Quadratic Stochastic Delayed Control and Deep Learning Resolution," Journal of Optimization Theory and Applications, Springer, vol. 191(1), pages 134-168, October.
    9. Emami Namini, Julian, 2014. "The short and long-run impact of globalization if firms differ in factor input ratios," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 37-64.

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    More about this item

    Keywords

    Investment; Capital market imperfections; Time-to-build;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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