Dynamic Investment Models and the Firm's Financial Policy

Stephen Roy Bond and Costas Meghir ()

Review of Economic Studies, 1994, vol. 61, issue 2, pages 197-222

Abstract: In this paper, the authors investigate the sensitivity of investment to the availability of internal funds using the hierarchy of finance approach to corporate finance. They characterize the empirical implications of this approach for dynamic investment models and test these implications using firm-level data. The model the authors estimate is based on the Eulet equation for optimal capital accumulation in the presence of convex adjustment costs. The theoretical model explicitly allows for debt finance and financial assets. The empirical investigation uses U.K. company panel data to estimate dynamic investment models using generalized method of moments and tests the derived implications. Copyright 1994 by The Review of Economic Studies Limited.

Date: 1994
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