Investment Behavior, Observable Expectations, and Internal Funds

By Jason G. Cummins, K. Hassett, Stephen D. Oliner. 2006

384 citations recorded by the source corpus.

We use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints. (JEL: D92, E22)

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/dfb78d0f6314c49ddf4b93b86d83fdb3784e640b

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Citations in the corpus

Financing Frictions and the Substitution between Internal and External Funds (2010, positive): “, Erickson and Whited (2000), Gomes (2001), and Cummins, Hasset, and Oliner (2006)).”
Internal financial constraints, external financial constraints, and investment choice: Evidence from a panel of UK firms. (2008, methodology): “These types of rules are common in the literature and we employ them to ensure comparability with previous work (Bond et al., 2003; Oliner et al., 2005).”
Credit channel, trade credit channel, and inventory investment: Evidence from a panel of UK firms (2006, background): “Trade credit issuance can increase in periods of tight 2 Cummins et al. (1999); Bond and Cummins (2001); and Bond et al. (2002) estimated Q-models of investment augmented with cash flow, where firms’ investment opportunities are more accurately controlled for than in traditional models, and found…”
A balancing act: Managing financial constraints and agency costs to minimize investment inefficiency in the Chinese market (2016, result): “Second, unlike most prior research, which examines sensitivities of investment to cash flow (Cleary, 1999; Cummins et al., 2006; Fazzari et al., 1988; Kaplan and Zingales, 1997), we focus on the sensitivity of abnormal investment to free cash flow.”
NO DEEP POCKETS: SOME STYLIZED EMPIRICAL RESULTS ON FIRMS' FINANCIAL CONSTRAINTS (2010, positive): “Finally, another group of literature points out that cash flows might contain information about firms’ investment opportunities, meaning that Q should be corrected (e.g. Chirinko, 1997; Erickson and Whited, 2000; Gomes, 2001; Alti, 2003; Abel and Eberly, 2004; Cummings et al., 2006).”
Investment, Idiosyncratic Risk, and Ownership (2011, positive): “First, we will follow Cummins et al. (2006) , Bond and Cummins (2004), and Bond et al. (2005).”
A review of tax research (2010, neutral): “See Erickson and Whited (2000), Hayashi (1982), Hassett and Hubbard (2002), Summers (1981), Fazzari et al. (1998), Kaplan and Zingales (2000), Hennessey and Whited (2007), Desai and Goolsbee (2004), and Cummins et al. (2006) for further discussions of the q literature.”
The Magnitude and Cyclical Behavior of Financial Market Frictions (2004, background): “Indeed, Elton et al. (2001) estimate that, on average, these tax factors can account for as much as 20 percent of corporate credit spreads.”