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Cash Flow, Investment, and Investment Opportunities: New Tests using UK Panel Data

Guariglia, A.; Carpenter, R.

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Authors

A. Guariglia

R. Carpenter



Abstract

The interpretation of the correlation between cash flow and investment is controversial. Some argue that it is caused by financial constraints, others by the correlation between cash flow and investment opportunities that are not properly measured by Tobin’s Q. This paper uses UK firms’ contracted capital expenditure to capture information about opportunities available only to insiders and thus not included in Q. When this variable is added to investment regressions, the explanatory power of cash flow falls for large firms, but remains unchanged for small firms. This suggests that the significance of cash flow stems from its role in capturing the effects of credit frictions.

Citation

Guariglia, A., & Carpenter, R. (2008). Cash Flow, Investment, and Investment Opportunities: New Tests using UK Panel Data. Journal of Banking and Finance, 32(9), 1894-1906. https://doi.org/10.1016/j.jbankfin.2007.12.014

Journal Article Type Article
Publication Date Sep 1, 2008
Deposit Date May 22, 2009
Publicly Available Date Mar 28, 2024
Journal Journal of Banking and Finance
Print ISSN 0378-4266
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 32
Issue 9
Pages 1894-1906
DOI https://doi.org/10.1016/j.jbankfin.2007.12.014
Keywords Investment, Tobin’s Q, Cash flow, Financial constraints.

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