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Liquidity Constraints, Fundamentals and Investment: What Do We Learn From Panel Data?

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  • Gian Maria Tomat

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type="main" xml:lang="en"> Liquidity constraints are an important determinant of investment in imperfect financial markets. Firm's investment is a function of marginal q, although liquidity constraints impose an upper bound on investment. Moreover, expectations over future liquidity conditions entail a financial accelerator effect on the firm's marginal q. Under regularity conditions there exists a relation between marginal and average q. However, these quantities are not equivalent in the presence of liquidity constraints, therefore econometric estimates using Tobin q as explanatory variable in the investment equation are subject to distortion. Econometric evidence from a dynamic panel of Italian firms in the period 1996–2010 supports these findings.

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  • Gian Maria Tomat, 2014. "Liquidity Constraints, Fundamentals and Investment: What Do We Learn From Panel Data?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 43(3), pages 249-281, November.
  • Handle: RePEc:bla:ecnote:v:43:y:2014:i:3:p:249-281
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