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Discussion of “Overinvestment of free cash flow”

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Abstract

Richardson’s paper is a useful addition to the literature on the relationship between cash flow and investment. His approach to estimating this relationship is a new twist on earlier approaches. Like most of this literature, Richardson finds evidence that firms’ investment decisions are excessively sensitive to current cash flow, suggesting that violations of the Modigliani–Miller assumptions are empirically important. My view is that conceptual and implementation problems beset Richardson’s attempt to identify the specific violation of the Modigliani–Miller assumptions, and his evidence on this second point is not convincing.

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Notes

  1. Hadlock (1998) makes a valiant effort to disentangle the impact of these imperfections using an empirical test based on managerial stock ownership.

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  1. Harvard Business School, Baker Library 245, Boston, MA, 02163, USA

    Daniel Bergstresser

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  1. Daniel Bergstresser
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Correspondence to Daniel Bergstresser.

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Bergstresser, D. Discussion of “Overinvestment of free cash flow”. Rev Acc Stud 11, 191–202 (2006). https://doi.org/10.1007/s11142-006-9002-3

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  • DOI: https://doi.org/10.1007/s11142-006-9002-3

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