Capital market imperfections and the q-theory of investment: theory and evidence
Most studies of corporate investment assume perfect capital markets and ignore the influence of financing decisions on real investment. This paper explores whether capital market imperfections are helpful in explaining real corporate investment. I develop a variant of a q-theory model of investment in which investment and financing decisions interact. The model suggests a modified empirical investment equation in which both q and financial factors are explanatory variables. This equation is tested using aggregate U.S. data. The empirical results support the modified q-theory model and suggest that capital market imperfections have important effects on corporate investment decisions.
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