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.