Investment Behavior, Observable Expectations, and Internal Funds
Jason G. Cummins, Kevin A. Hassett, Stephen D. Oliner
American Economic Review · 2006 · Volume 96 · Issue 3
Abstract
We use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints. (JEL: D92, E22)
Keywords
Search, Learning, Information and Knowledge, Communication, Belief, Capital Budgeting, Fixed Investment and Inventory Studies, Capacity, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
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