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Discussion of “Overinvestment of free cash flow”

Discussion of “Overinvestment of free cash flow” 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of “Overinvestment of free cash flow”

Review of Accounting Studies , Volume 11 (3) – May 20, 2006

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References (16)

Publisher
Springer Journals
Copyright
Copyright © 2006 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
DOI
10.1007/s11142-006-9002-3
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 20, 2006

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