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American Economic Review: Vol. 91 No. 5 (December 2001)


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Financing Investment

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Gomes, Joao F. 2001. "Financing Investment." American Economic Review, 91(5): 1263-1285.

DOI: 10.1257/aer.91.5.1263


We examine investment behavior when firms face costs in the access to external funds. We find that despite the existence of liquidity constraints, standard investment regressions predict that cash flow is an important determinant of investment only if one ignores q. Conversely, we also obtain significant cash flow effects even in the absence of financial frictions. These findings provide support to the argument that the success of cash-flow-augmented investment regressions is probably due to a combination of measurement error in q and identification problems.

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Gomes, Joao F. (U PA and CEPR)

JEL Classifications

G31: Capital Budgeting; Fixed Investment and Inventory Studies
E22: Capital; Investment; Capacity

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