An Analytic Framework For Interpreting Investment Regressions In The Presence Of Financial Constraints

Andrew Abel and Stavros Panageas

No 26898, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A financial constraint that prevents access to external funds induces non-classical measurement error in average q as a proxy for unobservable marginal q. Unlike classical measurement error, this measurement error biases upward the coefficient on average q in a univariate regression of investment on average q. In a multiple regression of investment on average q and cash flow, the coefficient on cash flow is positive. The positive cash-flow coefficient indicates the presence of a financial constraint, but it does not indicate a shortage of liquidity to fund current investment. In addition, the coefficient on average q is biased downward.

JEL-codes: E22 G33 G35 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-mac
Note: AP CF EFG
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Citations: View citations in EconPapers (4)

Published as Andrew B Abel & Stavros Panageas & Stefano Giglio, 2022. "An Analytic Framework for Interpreting Investment Regressions in the Presence of Financial Constraints," The Review of Financial Studies, vol 35(9), pages 4055-4104.

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Journal Article: An Analytic Framework for Interpreting Investment Regressions in the Presence of Financial Constraints (2022)
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