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

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Article Highlights

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

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

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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.

 

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

 

Stephen D.
Oliner
  • Stephen D. Oliner is a resident scholar at the American Enterprise Institute (AEI) and a senior fellow at the University of California, Los Angeles (UCLA) Ziman Center for Real Estate.

    Oliner joined AEI after spending more than 25 years at the Federal Reserve Board. An economist by training, Oliner held a number of high-level positions at the Fed and was closely involved in the Fed's analysis of the US economy and financial markets. Since leaving the Fed, Oliner has become well known for his analysis of US monetary policy and has maintained an active research agenda that focuses on real estate issues and the US economy’s growth potential.  He is coprincipal developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    Oliner has a Ph.D. and an M.S. in economics from the University of Wisconsin. He received a B.A. in economics from the University of Virginia.

  • Phone: 202.419.5205
    Email: stephen.oliner@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202.419.5212
    Email: emily.rapp@aei.org

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