Not your average firm : a quantile regression approach to the firm level investment

The large majority of the work published on firm investment is done in the neoclassical frame of a rational optimizing firm attempting to achieve optimal size. While this frame addresses one important consideration in firm investment, it has two important shortcomings that this paper will address. First, it doesn't have a clear interpretation of how the cashflows are affecting the firm investment decisions. Second, the standard approach operates on an "average firm," which in fact is significantly different from a firm with modal investment behavior. This study employs a Bayesian quantile regression model that yields two significant results. First concerning the relative responsiveness of these two neglected factors, it determines that the firms with higher investment rates have higher responsiveness to the valuation ratio and lower responsiveness to the profit rate. Second and of broader political economic note, it finds a decline in the responsiveness of firm investment to these factors that is consistent with the widely discussed macroeconomic "secular stagnation" of the US economy, and within that consistency, that the decline varies across sectors, and is more pronounced in firms with higher investment rates.