Financial variables such as cash flow and cash stocks are robust and quantitatively important explanatory variables for investment at the firm-level. A large body of recent empirical work attributes these findings to capital market imperfections. This interpretation is controversial, however, because even in the absence of capital market imperfections, such financial variables may appear as an explanatory variable for investment if they contain information about the expected marginal value of capital. In this paper, we show how structural models of investment with costly external finance can be used to identify and quantify the fundamental' versus the financial' determinants of investment. Our empirical results show that investment responds significantly to both fundamental and financial factors. Point estimates from our structural model imply that, for the average firm in our sample, financial factors raise the overall response of investment to an expansionary shock by 25%, relative to a baseline case where financial frictions are zero. Consistent with theory, small firms and firms without bond ratings show the strongest response to financial factors, while bond-rated firms show little if any response once we control for investment fundamentals.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6652.
Length: Date of creation: Jul 1998 Date of revision: Handle: RePEc:nbr:nberwo:6652
Note: ME Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Related research
Keywords:
Other versions of this item:
Find related papers by JEL classification: E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
References listed on IDEAS 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.:
Ricardo J. Caballero, 1997.
"Aggregate Investment,"
NBER Working Papers
6264, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Cited by: (explanations, 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.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.