Non-Tobin’s q in Tests for Financial Constraints to Investment
Liquidity constrained firms may be under two very well identified investment regimes, constrained and unconstrained. In this paper I derive theoretical investment equations for both regimes and discuss the consequences of ignoring the specific form of the liquidity constrained regime. I also show that expressing the investment equation as a function of Tobin’s q is by no means necessary in theory and in practice, in particular, it is not required to test for liquidity constraints.
KeywordsCash Flow Euler Equation Financial Constraint Investment Equation Adjustment Cost
I prepared this paper for the Conference: The Economics of Imperfect Markets: Their Interaction and The Consequences for Economic Theory and Policy, University of Rome, La Sapienza, Faculty of Economics, May 16 and 17 2008. I thank Giorgio Cacagnini, Germana Giombini and Enrico Saltari for their kind invitation to participate in this conference. I also thank them as well as several other participants for their useful comments. All errors and omission are only mine.
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