IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/1656.html
   My bibliography  Save this paper

The investment decision : a re-examination of competing theories using panel data

Author

Listed:
  • Samuel, Cherian

Abstract

In the United States, gross business fixed investments constitute about 10 percent of the Gross National Product (GNP). Such investments may represent GNP's most important component because: a) plant and equipment have a long-term effect on the economy's productive capacity, b) changes in investment spending directly affect employment levels and workers'incomes in durable goods industries, and c) supply and demand are sensitive to investment changes. Economists have long been concerned about what determines capital spending investments. Using data for US manufacturing firms for 1972-90, the author compares five investment theories: accelerator theory, cash flow theory, neoclassical theory, modified neoclassical theory and Q theory. If the results for cross-section regressions can be viewed as representing the long-term equilibrium, the single most important determinant of capital spending appears to be cash flow. Apparently, managers care more about cash flow and cost of capitalthan about stock market signals and the level of output. And at the firm level, managerial perceptions about fundamentals are more important that market perceptions. For managers, the stock market may be a side show to capital spending decisions. To generalize in a way useful for developing countries: firm level financial decisions are closely linked to real decisions in the economy. Internal finance is the most important use of funds so there is a close relationship between real and financial decisions.

Suggested Citation

  • Samuel, Cherian, 1996. "The investment decision : a re-examination of competing theories using panel data," Policy Research Working Paper Series 1656, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1656
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1996/09/01/000009265_3961214162847/Rendered/PDF/multi_page.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    2. Dale Jorgenson, 1967. "The Theory of Investment Behavior," NBER Chapters,in: Determinants of Investment Behavior, pages 129-175 National Bureau of Economic Research, Inc.
    3. Bernanke, Ben & Bohn, Henning & Reiss, Peter C., 1988. "Alternative non-nested specification tests of time-series investment models," Journal of Econometrics, Elsevier, vol. 37(3), pages 293-326, March.
    4. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 33-60.
    5. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
    6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    7. Grabowski, Henry G & Mueller, Dennis C, 1972. "Managerial and Stockholder Welfare Models of Firm Expenditures," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 9-24, February.
    8. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    9. Siebert, Calvin D. & Jorgenson, Dale W., 1968. "Optimal Capital Accumulation and Corporate Investment Behavior," Scholarly Articles 3403057, Harvard University Department of Economics.
    10. Eisner, Robert & Nadiri, M Ishaq, 1970. "Neoclassical Theory of Investment Behavior: A Comment," The Review of Economics and Statistics, MIT Press, vol. 52(2), pages 216-222, May.
    11. R. Glenn Hubbard & Anil K. Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
    12. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    13. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    14. Harris, John R & Schiantarelli, Fabio & Siregar, Miranda G, 1994. "The Effect of Financial Liberalization on the Capital Structure and Investment Decisions of Indonesian Manufacturing Establishments," World Bank Economic Review, World Bank Group, vol. 8(1), pages 17-47, January.
    15. Rhee, C. & Rhee, W., 1991. "Fundamental Value and Investment: Micro Data Evidence," RCER Working Papers 282, University of Rochester - Center for Economic Research (RCER).
    16. Samuel, Cherian, 1996. "Stock market and investment : the governance role of the market," Policy Research Working Paper Series 1578, The World Bank.
    17. Bleaney, Michael & Greenaway, David, 1993. "Adjustment to external imbalance and investment slumps in developing countries," European Economic Review, Elsevier, vol. 37(2-3), pages 577-585, April.
    18. Benjamin M. Friedman & David I. Laibson, 1989. "Economic Implications of Extraordinary Movements in Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 137-190.
    19. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    20. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-1147, December.
    21. Jaramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1993. "The effect of financial liberalization on allocation of credit : panel data evidence for Ecuador," Policy Research Working Paper Series 1092, The World Bank.
    22. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:rss:jnljee:v4i3p5 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1656. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: http://edirc.repec.org/data/dvewbus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.