Liquidity Constraints, Fundamentals and Investment: What Do We Learn From Panel Data?

Gian Maria Tomat

Economic Notes, 2014, vol. 43, issue 3, 249-281

Abstract: type="main" xml:lang="en">

Liquidity constraints are an important determinant of investment in imperfect financial markets. Firm's investment is a function of marginal q, although liquidity constraints impose an upper bound on investment. Moreover, expectations over future liquidity conditions entail a financial accelerator effect on the firm's marginal q. Under regularity conditions there exists a relation between marginal and average q. However, these quantities are not equivalent in the presence of liquidity constraints, therefore econometric estimates using Tobin q as explanatory variable in the investment equation are subject to distortion. Econometric evidence from a dynamic panel of Italian firms in the period 1996–2010 supports these findings.

Date: 2014
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