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American Economic Review: Vol. 96 No. 3 (June 2006)
AER Volume. 96, Issue 3 | 
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Investment Behavior, Observable Expectations, and Internal Funds
Article Citation
Cummins, Jason G.,
Kevin A. Hassett, and
Stephen D. Oliner. 2006. "Investment Behavior, Observable Expectations, and Internal Funds."
American Economic Review,
96(3): 796-810.
DOI: 10.1257/aer.96.3.796
DOI: 10.1257/aer.96.3.796
Abstract
We use earnings forecasts from securities analysts to construct a new measure of the
neoclassical fundamentals that drive investment spending. We find that investment responds significantly to our new measure of fundamentals but is insensitive to cash flow, even for firms typically thought to be liquidity constrained. These results have two key implications. First, fundamentals may be more important for investment spending than would be suggested by the results to date from investment-q models. Second, the positive cash-flow effects obtained in such models may reflect a failure to control properly for fundamentals rather than the presence of financial constraints. (JEL: D92, E22)
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Full-text Article
Additional Materials
Download Data Set (1.05 MB) | Link to Additional Materials (160.51 KB)
Authors
Cummins, Jason G.
Hassett, Kevin A.
Oliner, Stephen D.
Hassett, Kevin A.
Oliner, Stephen D.
