Investment and Financing Constraints: A Switching Regression Approach Using U.S. Firm Panel Data

In this paper we develop a switching regression model of investment, in which the probability of a firm being financially constrained is endogenously determined. This approach allows one to address the potential problem of static and dynamic misclassification encountered where firms are sorted using a criteria chosen a priori. The empirical results obtained for US panel data suggest that the probability of being constrained depends upon variables that capture each firm's credit worthiness, and it is also related to general macroeconomic conditions and to the tightness of monetary policy.