Non-Tobin’s q in Tests for Financial Constraints to Investment

Part of the Contributions to Economics book series (CE)


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.


Cash Flow Euler Equation Financial Constraint Investment Equation Adjustment Cost 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.



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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© Springer Physica-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.Department of EconomicsStony Brook UniversityStony BrookUSA

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