Working Paper: CEPR ID: DP6737
Authors: Janice Eberly; Sergio Rebelo; Nicolas Vincent
Abstract: Which investment model best fits firm-level data? To answer this question we estimate alternative models using Compustat data. Surprisingly, the two best-performing specifications are based on Hayashi's (1982) model. This model's foremost implication, that Q is a sufficient statistic for determining a firm's investment decision, has been often rejected because cash-flow and lagged-investment effects are present in investment regressions. However, we find that these regression results are quite fragile and ineffectual for evaluating model performance. So, forget what investment regressions tell you. Models based on Hayashi (1982) provide a very good description of investment behaviour at the firm level.
Keywords: cash flow; Tobin's q
JEL Codes: E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tobin's q (G19) | firm's investment decision (G11) |
| cash flow (E50) | measurement error in q (C20) |
| lagged investment effects (E22) | investment behavior (G11) |
| generalized Hayashi model (E19) | investment behavior (G11) |
| cash flow and lagged investment effects (G31) | investment regressions (C29) |
| measurement error in q (C20) | cash flow effects (G19) |