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

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

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