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Investment Behavior, Observable Expectations, and Internal Funds

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Author Info
Jason G. Cummings
Kevin A. Hassett
Stephen D. Oliner

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Abstract

We use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints. (JEL: D92, E22)

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 3 (June)
Pages: 796-810
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Handle: RePEc:aea:aecrev:v:96:y:2006:i:3:p:796-810

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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