In the late 1970s, many economists argued that the deleterious effects of inflation on the user cost of capital for U.S. firms were large. Since that time, the tax code has changed, the level of inflation has dropped significantly, and the of investment has evolved considerably. In this paper,...

We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. Using a variety of econometric techniques, including semi-parametric estimators, we find that investment responds significantly--in both...

The relation between shareholder-level taxes and firm value has fundamental implications for understanding why firms pay dividends and how taxes influence capital structure choices. Despite its importance, however, several underlying problems have hampered existing research on the specific...

Himmelberg, Hubbard, and Love combine the agency theory of the firm with risk diversification incentives for insiders. Principal-agent problems between insiders and outsiders force insiders to retain a larger share in their firm than they would under a perfect risk diversification strategy. The...

In this paper, we argue that costly external financing for entrepreneurial investments (coupled with potentially high returns on those investments) has important implications for the saving, investment, and entry decisions of continuing and potential entrepreneurs. These effects are similar in...

Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the quot;cost of capitalquot; or quot;qquot;). An alternative approach emphasizes the importance of cash flow as a determinant of investment...

We examine the neoclassical investment model using a panel of U.S. manufacturing firms. The standard model with no financing constraints cannot be rejected for firms with high (pre-sample) dividend payouts. However, it is decisively rejected for firms with low (pre-sample) payouts (firms we...

Is corporate leverage excessive? Is the tax code distorting corporate capital structure decisions in a way that increases the possibility of an economic crisis owing to quot;financial instabilityquot;?Answering these kinds of questions first requires some precision in terminology. In this paper,...

Over the past decade, a number of researchers have extended conventional models of business fixed investment to incorporate a role for financial constraints' in determining investment. This paper reviews developments and challenges in this empirical research, and uses advances in models of...