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Euler investment equation, leverage and cash flow misspecification: An empirical analysis on a panel of French manufacturing firms

  • Chatelain, Jean-Bernard
  • Teurlai, Jean-Christophe

Using a large panel of French manufacturing firms, this paper first reports tests for cash flow misspecification in structural Euler equation including or not leverage. If those tests are not rejected for both Euler equations, in a second step, a direct test on the omission of leverage in the Euler equation is reported. Three groups of “financially healthy” firms (high dividend payout, rising debt, high cash flow with respect to investment) exhibit (in some cases, small) risk premia which significantly increases with leverage. The neo-classical Euler equation is rejected on all groups of firms that have been investigated.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 28 (2006)
Issue (Month): 2 (June)
Pages: 361-374

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Handle: RePEc:eee:jmacro:v:28:y:2006:i:2:p:361-374
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