An Analytic Framework for Interpreting Investment Regressions in the Presence of Financial Constraints

A financial constraint that prevents access to external funds induces non-classical measurement error in average q as a proxy for unobservable marginal q. Unlike classical measurement error, this measurement error biases upward the coefficient on average q in a univariate regression of investment on average q. In a multiple regression of investment on average q and cash flow, the coefficient on cash flow is positive. The positive cash-flow coefficient indicates the presence of a financial constraint, but it does not indicate a shortage of liquidity to fund current investment. In addition, the coefficient on average q is biased downward

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Year of publication:	2020
Authors:	Abel, Andrew B.
Other Persons:	Panageas, Stauros (contributor)
Publisher:	[2020]: [S.l.] : SSRN
Subject:	Budgetrestriktion \| Budget constraint \| Cash Flow \| Cash flow \| Eigenkapital \| Equity capital \| Tobins Q \| Tobin's Q \| Rentabilität \| Profitability \| Betriebliche Investitionstheorie \| Corporate investment theory

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