Demand, q, financial constraints and shareholder value revisited: an econometric micro-analysis of US fixed investment

Firm-level fixed investment expenses are analysed using a large panel of US manufacturing firms from 1971 to 2007. Integrating the user cost of capital, q and accelerator theories of investment to one econometric specification, we estimate the impacts of sales growth, cash flow, the cost of capital and Tobin's q on investment. Extending the baseline model, we further analyse the effects of financial leverage, the rise of shareholders' influence in corporate governance and an alternative to Tobin's q, the bond market's q, on investment. We find that sales growth, financial leverage and the bond market's q contribute substantially to predicting firm-level investment. Cash flow and Tobin's q are statistically significant but with low marginal effects. We find that the average firm's shareholder-value orientation does not affect its investment behaviour significantly.