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Investment Behavior, Observable Expectations and Internal Funds

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

We use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints. (JEL: D92, E22)

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File URL: http://econ.as.nyu.edu/docs/IO/9382/RR97-30.PDF
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 97-30.

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Length: 47 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:cvs:starer:97-30
Contact details of provider: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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