Investment, Marginal Q, and Net Worth: Evidence from Europe
: The paper empirically studies the financing of investment under incentive problems. From the perspective of informational asymmetries among contracting parties, the firm does not behave as in the neoclassical framework. By contrast, it bears the restriction to access external funds, when information asymmetry is severe. After deriving the Q-model, the estimation strategy consists of specifying static and dynamic Q-equations and fitting them using a set of nine OECD European countries. The empirical regularities show that, even after correcting for the endogeneity problem and controlling for Tobin s Q, the investment-cash flow sensitivity does not necessarily behave according to the so-called upward monotonic behavior predicted by Fazzari et al. (1988, 1996 and 2000). The paper therefore supports the theoretical and empirical results of Kaplan and Zingales (1997 and 2000), Lyandres (2007), and Mansour (2009) casting doubt on the usefulness of the investment-cash flow sensitivity as a useful metric for financing constraints.
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Volume (Year): IX (2010)
Issue (Month): 3 (July)
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