An Empirical Assessment of the Accounting Semi-Identity Problem's Pervasiveness and Severity
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arXiv
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| Natura: | Preprint |
| Pubblicazione: |
2025
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| _version_ | 1866908645115035648 |
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| author | Sánchez-Vidal, F. Javier |
| author_facet | Sánchez-Vidal, F. Javier |
| contents | This paper investigates a fundamental methodological flaw in the investment-cash flow sensitivity model of Fazzari, Hubbard, and Petersen (1988). The model comes from a full accounting identity in which some components are missing, generating what I term an Accounting Semi-Identity, that mechanically links investment and cash flow, and this could bias coefficients, making the estimation difficult if not impossible. I propose an augmented specification including a variable that captures this arithmetic bias and test it across multiple firm-level databases. Results show that the ASI distortion is universal and severe: the ASI issue is present in 100% of the databases and explains more than 83% of the total explained variance, while the standard Fazzari, Hubbard, and Petersen (1988) model only accounts for approximately 17%. These findings suggest that a substantial body of prior empirical research based on this model may have reported spurious results rather than evidence of underlying economic behavior. This finding provides a compelling explanation for the substantial body of literature surrounding this model that has reported anomalous and incoherent results. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2511_08591 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | An Empirical Assessment of the Accounting Semi-Identity Problem's Pervasiveness and Severity Sánchez-Vidal, F. Javier General Finance This paper investigates a fundamental methodological flaw in the investment-cash flow sensitivity model of Fazzari, Hubbard, and Petersen (1988). The model comes from a full accounting identity in which some components are missing, generating what I term an Accounting Semi-Identity, that mechanically links investment and cash flow, and this could bias coefficients, making the estimation difficult if not impossible. I propose an augmented specification including a variable that captures this arithmetic bias and test it across multiple firm-level databases. Results show that the ASI distortion is universal and severe: the ASI issue is present in 100% of the databases and explains more than 83% of the total explained variance, while the standard Fazzari, Hubbard, and Petersen (1988) model only accounts for approximately 17%. These findings suggest that a substantial body of prior empirical research based on this model may have reported spurious results rather than evidence of underlying economic behavior. This finding provides a compelling explanation for the substantial body of literature surrounding this model that has reported anomalous and incoherent results. |
| title | An Empirical Assessment of the Accounting Semi-Identity Problem's Pervasiveness and Severity |
| topic | General Finance |
| url | https://arxiv.org/abs/2511.08591 |