Journal
JOURNAL OF POLITICAL ECONOMY
Volume 108, Issue 5, Pages 1027-1057Publisher
UNIV CHICAGO PRESS
DOI: 10.1086/317670
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Many recent empirical investment studies have found that the investment of financially constrained firms responds strongly to cash flow Paralleling these findings is the disappointing performance of the q theory of investment: even though marginal q should summarize the effects of all factors relevant to the investment decision, cash flow still matters. We examine whether this failure is due to error in measuring marginal q. Using measurement error-consistent generalized method of moments estimators, we find that most of the stylized facts produced by investment-q cash flow regressions are artifacts of measurement error. Cash flow does not matter, even for financially constrained firms, and despite its simple structure, q theory has good explanatory power once purged of measurement error.
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