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Investment Behavior, Observable Expectations and Internal Funds

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  • Cummins, Jason
  • Hassett, Kevin
  • Oliner, Stephen

Abstract

We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. We find that investment responds significantly -- in both economic and statistical terms -- to our new measures of fundamentals. Our estimates imply that the elasticity of the investment-capital ratio with respect to a change in fundamentals is generally greater than unity. In addition, we find that internal funds are uncorrelated with investment spending, even for selected subsamples of firms -- those paying no dividends and those without bond ratings -- that have been found to be "liquidity constrained" in previous studies. Our results cast doubt on the evidence for liquidity constraints from the many studies that have used Tobin's Q to control for the expected returns to investment.
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Suggested Citation

  • 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.
  • Handle: RePEc:cvs:starer:97-30
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    Keywords

    Semiparametric methods; partially-linear model; investment; cash flow; Tobin's Q;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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