Investment behavior, observable expectations, and internal funds

Jason Cummins (), Kevin Allen Hassett () and Stephen D. Oliner ()

No 1999-27, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Investments; Liquidity (Economics); Econometric models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 1999
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Related works:
Working Paper: Investment Behavior, Observable Expectations and Internal Funds (1997)
Journal Article: Investment Behavior, Observable Expectations, and Internal Funds (2006)
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