Investment Behavior
Investment Behavior, Observable Expectations, and Internal Funds
Jason G. Cummins ∗ Assistant Professor New York University 269 Mercer Street New York, NY 10003 jcummins@econ.nyu.edu Kevin A. Hassett Resident Scholar American Enterprise Institute 1150 17th Street NW Washington, DC 20036 khassett@aei.org Stephen D. Oliner Asst. Dir. of Research Federal Reserve Board Mail Stop 93 Washington, DC 20551 soliner@frb.gov
First Draft: September 8, 1997 Second Draft: July 6, 1998 Third Draft: March 31, 1999
Abstract We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. We find that investment responds significantly — in both economic and statistical terms — to our new measures of fundamentals. Our estimates imply that the elasticity of the investmentcapital ratio with respect to a change in fundamentals is generally greater than unity. In addition, we find that internal funds are uncorrelated with investment spending, even for selected subsamples of firms — those paying no dividends and those without bond ratings — that have been found to be “liquidity constrained” in previous studies. Our results cast doubt on the evidence for liquidity constraints from the many studies that have used Tobin’s Q to control for the expected returns to investment. JEL Classification: D92, E22. Keywords: Investment; Tobin’s Q; Cash Flow; Liquidity Constraints.
We thank Steve Bond, Ricardo Caballero, Mark Gertler, Simon Gilchrist, John Hand, Glenn Hubbard, Steve Kaplan, Owen Lamont, Plutarchos Sakellaris and seminar participants at Brandeis University, UC Berkeley, the Econometric Society Winter Meetings, the Federal Reserve Board, University College London, the University of Maryland, the NBER Economic Fluctuations and Monetary Economics Program Meetings, Northwestern University, New York University, Tilburg University, and Yale University for helpful comments and suggestions. Cummins
Jason G. Cummins ∗ Assistant Professor New York University 269 Mercer Street New York, NY 10003 jcummins@econ.nyu.edu Kevin A. Hassett Resident Scholar American Enterprise Institute 1150 17th Street NW Washington, DC 20036 khassett@aei.org Stephen D. Oliner Asst. Dir. of Research Federal Reserve Board Mail Stop 93 Washington, DC 20551 soliner@frb.gov
First Draft: September 8, 1997 Second Draft: July 6, 1998 Third Draft: March 31, 1999
Abstract We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. We find that investment responds significantly — in both economic and statistical terms — to our new measures of fundamentals. Our estimates imply that the elasticity of the investmentcapital ratio with respect to a change in fundamentals is generally greater than unity. In addition, we find that internal funds are uncorrelated with investment spending, even for selected subsamples of firms — those paying no dividends and those without bond ratings — that have been found to be “liquidity constrained” in previous studies. Our results cast doubt on the evidence for liquidity constraints from the many studies that have used Tobin’s Q to control for the expected returns to investment. JEL Classification: D92, E22. Keywords: Investment; Tobin’s Q; Cash Flow; Liquidity Constraints.
We thank Steve Bond, Ricardo Caballero, Mark Gertler, Simon Gilchrist, John Hand, Glenn Hubbard, Steve Kaplan, Owen Lamont, Plutarchos Sakellaris and seminar participants at Brandeis University, UC Berkeley, the Econometric Society Winter Meetings, the Federal Reserve Board, University College London, the University of Maryland, the NBER Economic Fluctuations and Monetary Economics Program Meetings, Northwestern University, New York University, Tilburg University, and Yale University for helpful comments and suggestions. Cummins
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