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An Analytic Framework For Interpreting Investment Regressions In The Presence Of Financial Constraints

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  • Andrew B. Abel
  • Stavros Panageas

Abstract

A financial constraint that prevents access to external funds induces non-classical measurement error in average q as a proxy for unobservable marginal q. Unlike classical measurement error, this measurement error biases upward the coefficient on average q in a univariate regression of investment on average q. In a multiple regression of investment on average q and cash flow, the coefficient on cash flow is positive. The positive cash-flow coefficient indicates the presence of a financial constraint, but it does not indicate a shortage of liquidity to fund current investment. In addition, the coefficient on average q is biased downward.

Suggested Citation

  • Andrew B. Abel & Stavros Panageas, 2020. "An Analytic Framework For Interpreting Investment Regressions In The Presence Of Financial Constraints," NBER Working Papers 26898, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26898
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    Cited by:

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    2. Draca, Mirko & Garred, Jason & Stickland, Leanne & Warrinnier, Nele, 2018. "On Target? The Incidence of Sanctions Across Listed Firms in Iran," CAGE Online Working Paper Series 372, Competitive Advantage in the Global Economy (CAGE).
    3. Mirko Draca & Jason Garred & Leanne Stickland & Nele Warrinnier, 2023. "On Target? Sanctions and the Economic Interests of Elite Policymakers in Iran," The Economic Journal, Royal Economic Society, vol. 133(649), pages 159-200.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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