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Finance Constraints, Liquidity, and Investment Spending: Theoretical Restrictions and International Evidence

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  • Chirinko, Robert S.

Abstract

Theoretical and empirical models of investment spending have treated financial structure very differently. Recent research has begun to narrow this gap and, based on developments in the economics of information, has drawn theoretical links between investment spending and the frictions and constraints in financial markets. Furthermore, the sensitivity of investment to liquidity and other financial variables has been documented empirically for several industrialized countries. Despite this progress, the theoretical advances have not been exploited fully in econometric work, and questions remain concerning the interpretation of empirical results. To continue to narrow the gap between theoretical and empirical investment models, this paper studies finance constraints in a formal framework, explores their impact on the specification of Q investment equations, and develops two new tests of finance constraints that are evaluated for firms in several countries. While these tests provide some support for the importance of finance constraints, they temper previous conclusions and highlight the critical role for explicit theoretical models in guiding empirical research.
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  • Chirinko, Robert S., 1997. "Finance Constraints, Liquidity, and Investment Spending: Theoretical Restrictions and International Evidence," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 185-207, June.
  • Handle: RePEc:eee:jjieco:v:11:y:1997:i:2:p:185-207
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    Cited by:

    1. von Kalckreuth, Ulf & Jorg Breitung & Robert S Chirinko, 2003. "A Vectorautoregressive Investment Model (VIM) and Monetary Policy Transmission: Panel Evidence from German Firms," Royal Economic Society Annual Conference 2003 213, Royal Economic Society.
    2. Rune Stenbacka & Mihkel Tombak, 2002. "Investment, Capital Structure, and Complementarities Between Debt and New Equity," Management Science, INFORMS, pages 257-272.
    3. Saltari, Enrico & Travaglini, Giuseppe, 2006. "The effects of future financing constraints on capital accumulation: Some new results on the constrained investment problem," Research in Economics, Elsevier, pages 85-96.
    4. Jean-Bernard Chatelain, 2003. "Structural Modelling of Financial Constraints on Investment: Where Do We Stand?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00112522, HAL.
    5. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Gelos, R. Gaston & Werner, Alejandro M., 2002. "Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector," Journal of Development Economics, Elsevier, pages 1-27.
    7. Cummins, Jason & Hassett, Kevin & Oliner, Stephen, 1997. "Investment Behavior, Observable Expectations and Internal Funds," Working Papers 97-30, C.V. Starr Center for Applied Economics, New York University.
    8. Fohlin, Caroline, 1999. "Universal Banking in Pre-World War I Germany: Model or Myth?," Explorations in Economic History, Elsevier, vol. 36(4), pages 305-343, October.
    9. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, pages 796-810.

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