Comments on 'Investment Cash Flow Sensitivity: Fact or Fiction?' by Senay Agca and Abon Mozumdar

Graph by Shutterstock.com

Article Highlights

  • .@AEIecon scholars assess the influence of cash flow on investment when controlling for error in Tobin’s Q.

    Tweet This

  • .@AEIecon’s Hassett and Oliner respond to “Investment Cash Flow Sensitivity: Fact or Fiction?" by Agca & Mozumdar

    Tweet This

In Cummins, Hassett, and Oliner (2006), we assessed the influence of cash flow on investment when controlling explicitly for measurement error in Tobin's Q. We showed that the cash-flow effects often found in other studies disappeared after controlling for this measurement error. We also showed that a measure of Q based on analyst forecasts of firm-level earnings does a better job of capturing the fundamentals that drive investment spending than does the usual measure of Q based on stock prices.

Agca and Mozumdar (2012), henceforth AM, assert that errors in our data and econometric methodology are responsible for both of our key findings. AM identify three alleged problems with our work: (a) that we may have misdated the cash-flow series in our dataset, (b) that the set of instruments we use is too restrictive, and (c) that our analyst-based measure of Q is flawed.

As discussed below, we do not find AM's critique to be compelling. First, AM provide no convincing evidence to support the claim that our cash-flow series was misdated. Second, even when AM modify our data to correct this alleged problem, use their preferred instruments, and substitute a different analyst-based measure of Q, their results do not overturn the central findings in our paper. We cannot emphasize this point strongly enough: When AM use our dataset, modified as they see fit, they do not reverse our results. Only when they construct their own dataset do their results differ substantially from those in our paper. Those results may be of interest in their own right, but they do not constitute a rebuttal of our findings.

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Kevin A.
Hassett

 

Stephen D.
Oliner

What's new on AEI

Rebuilding American defense: A speech by Governor Bobby Jindal
image Smelling liberal, thinking conservative
image Stopping Ebola before it turns into a pandemic
image All too many reasons for pessimism about Europe
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Event Registration is Closed
Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.