Working Paper: NBER ID: w26898
Authors: Andrew B. Abel; Stavros Panageas
Abstract: A financial constraint that prevents access to external funds induces non-classical measurement error in average q as a proxy for unobservable marginal q. Unlike classical measurement error, this measurement error biases upward the coefficient on average q in a univariate regression of investment on average q. In a multiple regression of investment on average q and cash flow, the coefficient on cash flow is positive. The positive cash-flow coefficient indicates the presence of a financial constraint, but it does not indicate a shortage of liquidity to fund current investment. In addition, the coefficient on average q is biased downward.
Keywords: financial constraints; investment; average q; marginal q; measurement error
JEL Codes: E22; G33; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial constraints (H60) | optimal capital investment decisions (G31) |
| financial constraints (H60) | firm value (G32) |
| firm value (G32) | average q (C39) |
| firm value (G32) | marginal q (C21) |
| financial constraints (H60) | wedge between average q and marginal q (D43) |
| average q (C39) | marginal q (C21) |
| cash flow coefficient (G31) | conflation of impacts of financial constraints and expected future profitability (G41) |
| cash flow coefficient (G31) | liquidity for current investment (G31) |
| financial constraints (H60) | bias in estimated coefficients in investment regressions (C51) |