A panel study of investment: sales, cash flow, the cost of capital, and leverage
This article compares the investment spending for each of 396 corporations during the late 1980s and early 1990s to projections of their spending derived from several basic models of investment. According to these models, capital spending, on average, adheres closely to output, profits, and the cost of capital. The pattern of average forecast errors derived from the statistical models does not correspond very closely to measures of indebtedness, liquidity, size, or type of business. It is not surprising that these variables should influence capital spending so little, once the general business climate (represented by sales or cash flow) has been taken into account. ; For the making of economic policy, the evidence suggests that the familiar macroeconomic incentives for investment would be no less effective today than they have been in the past. In particular, the volume of investment spending would appear to respond to monetary and fiscal policies in the customary way. Despite their potential differences, the models agree that monetary or fiscal policy must be unusually aggressive to increase investment spending substantially when the rate of growth of GDP is unusually low.
Volume (Year): (1994)
Issue (Month): Jan ()
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