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Investment And Capital Market Imperfections: A Switching Regression Approach Using U.S. Firm Panel Data

Xiaoqiang Hu and Fabio Schiantarelli

The Review of Economics and Statistics, 1998, vol. 80, issue 3, 466-479

Abstract: In this paper we develop a switching regression model of investment, in which the probability of a firm facing a high premium on external finance is endogenously determined. This approach allows one to address the potential problem of static and dynamic misclassification encountered where firms are sorted using a criteria chosen a priori. We use U.S. firm level data to analyze the effects of variables that capture each firm's credit worthiness, asymmetric information, and agency problems on the probability of being in the high- or low-premium regime. The role of macroeconomic conditions and monetary policy is also discussed. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 1998
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The Review of Economics and Statistics is currently edited by Pierre Azoulay, Olivier Coibion, Will Dobbie, Raymond Fisman, Benjamin R. Handel, Brian A. Jacob, Kareen Rozen, Xiaoxia Shi, Tavneet Suri and Yi Xu

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