An Analytic Framework for Interpreting Investment Regressions in the Presence of Financial Constraints

Andrew B Abel and Stavros Panageas

The Review of Financial Studies, 2022, vol. 35, issue 9, 4055-4104

Abstract: We derive analytic solutions for the valuation, optimal investment, and optimal payout of a financially constrained firm. While marginal $q$ and average $q$ would be identically equal in the absence of financial constraints, they differ when financial constraints bind. We use analytic solutions to characterize the properties of regressions of investment on average $q$ and cash flow. The coefficient on cash flow is positive, but does not isolate the impact of the financial constraint, since it also partially reflects the impact of persistent profitability. The coefficient on average $q$ understates the impact of persistent profitability.

JEL-codes: E22 G32 G35 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Working Paper: An Analytic Framework For Interpreting Investment Regressions In The Presence Of Financial Constraints (2020)
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