The authors use earnings forecasts from securities analysts to construct a new measure of the neoclassical fundamentals that drive investment. They find that investment responds significantly--in both economic and statistical terms--to our new measure of fundamentals. In addition, they find that cash flow is uncorrelated with investment spending, even for firms that have been found to be “liquidity constrained” in previous studies. Taken together, the results cast doubt on the common interpretation of cash-flow effects in empirical investment equations using Brainard-Tobin average q.
Revised Draft, September 1, 2002.
Original Draft, March 31, 1999.