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This paper explores reasons for the strong relationship between cash flow and capital investment spending. The equilibrium level of Tobin's q is used to distinguish between liquidity constraints arising from asymmetric information and managerial over-investment of free cash flow. Results suggest that both the Jensen (1986) free cash flow and the Myers and Majluf (1984) pecking order hypotheses are potential explanations for the investment/cash flow relationship. Free cash flow behavior appears to arise most strongly in large, low-dividend firms when they invest in tangible assets. Pecking order behavior appears to arise in smaller, low-dividend firms and in firms making less tangible investments.
Stephen C. Vogt (Sat,) studied this question.