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Investment behavior, observable expectations, and internal funds

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

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Abstract

We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. We find that investment responds significantly -- in both economic and statistical terms -- to our new measures of fundamentals. Our estimates imply that the elasticity of the investment-capital ratio with respect to a change in fundamentals is generally greater than unity. In addition, we find that internal funds are uncorrelated with investment spending, even for selected subsamples of firms -- those paying no dividends and those without bond ratings -- that have been found to be "liquidity constrained" in previous studies. Our results cast doubt on the evidence for liquidity constraints from the many studies that have used Tobin's Q to control for the expected returns to investment.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-27.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-27

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Keywords: Investments Liquidity (Economics) Econometric models

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  32. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
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  33. Fabio Schiantarelli & Alessandro Sembenelli, 1995. "Form of Ownership and Financial Constraints: Panel Data Evidence from Leverage and Investment Equations," Boston College Working Papers in Economics 286., Boston College Department of Economics.
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