Investment and Cash Flow: New Evidence. (August 2016)

• Record Type: Journal Article
• Authors: Lewellen, Jonathan; Lewellen, Katharina
• Is Part Of: Journal of financial and quantitative analysis. Volume 51:Number 4(2016)
• Page Start: 1135
• Page End: 1164
• Publication Date: 2016-08
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S002210901600065X
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract : We study the investment–cash flow sensitivities of U.S. firms from 1971–2009. Our tests extend the literature in several key ways and provide strong evidence that cash flow explains investment beyond its correlation with q . A dollar of current- and prior-year cash flow is associated with $0.32 of additional investment for firms that are the least likely to be constrained and $0.63 of additional investment for firms that are the most likely to be constrained, even after correcting for measurement error in q . Our results suggest that financing constraints and free-cash-flow problems are important for investment decisions.