Financial Factors and Investment in Belgium, France, Germany and the UK:A Comparison Using Company Panel Data

Bond, Stephen; Elston, Julie Ann; Mairesse, Jacques; Mulkay, Benoît

doi:10.3386/w5900

Cited by 73 publications

(51 citation statements)

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“…Finally, these firms have less collateral in terms of existing assets which could be used for obtaining externa l loans. But Devereux and Schiantarelli (1990), and Bond, Elston, Mairesse and Mulkay (2003) have found stronger evidence of financial effects on investment among larger firms. Bond, Elston, Mairesse and Mulkay (2003) conclude that the availability of internal finance appears to ha ve been a more important constraint on company investment in the sample of UK firms than in samples from other continental European countries (France, Belgium and Germany) over the period [1978][1979][1980][1981][1982][1983][1984][1985][1986][1987][1988][1989].…”

Section: Model and Testable Hypothesesmentioning

confidence: 99%

“…But Devereux and Schiantarelli (1990), and Bond, Elston, Mairesse and Mulkay (2003) have found stronger evidence of financial effects on investment among larger firms. Bond, Elston, Mairesse and Mulkay (2003) conclude that the availability of internal finance appears to ha ve been a more important constraint on company investment in the sample of UK firms than in samples from other continental European countries (France, Belgium and Germany) over the period [1978][1979][1980][1981][1982][1983][1984][1985][1986][1987][1988][1989]. This finding is consistent with the suggestion that the market-oriented financial system in the UK performs less well in channelling investment funds to firms with profitable investment opportunities than do the continental European financial systems.…”

Section: Model and Testable Hypothesesmentioning

confidence: 99%

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Firm Growth and Liquidity Constraints: A Dynamic Analysis

2006

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Using a large unbalanced panel data set of Portuguese manufacturing firms surviving over the period from 1990 to 2001, the purpose of this paper is to examine whether liquidity constraints faced by business firms affect firm growth. We use a GMM-system to estimate a dynamic panel data model of firm growth tha t incorporates cash flow as a measure of liquidity constraints and persistence of growth. The model is estimated for all size classes, including micro firms. Our findings suggest that smaller and younger firms have higher growth-cash flow sensitivities tha n larger and more mature firms. This is consistent with the suggestion that financial constraints on firm growth may be relatively more severe for small and young firms. Finally, firms that were small and young and strongly liquidity-constrained at the beginning of the sample period exhibited more persistent growth than those that were large and old and weakly liquidity-constrained. These results have significant policy implications.

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Section: Model and Testable Hypothesesmentioning

confidence: 99%

Section: Model and Testable Hypothesesmentioning

confidence: 99%

Firm Growth and Liquidity Constraints: A Dynamic Analysis

2006

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“…Small cases represent logs. Our specification essentially follows Bond et al (2003) by modelling investment in a dynamic adjustment model. Current output is controlled by entering sales growth (∆y it ) in the regression.…”

Section: The Empirical Frameworkmentioning

confidence: 99%

Firms’ investment decisions in response to demand and price uncertainty

Fuss

Vermeulen

2008

Applied Economics

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“…Hayashi (1982) showed that under certain restrictions on the profit function, 10 marginal Q, which is unobserved, equals average Q, defined as follows:…”

Section: Expected Profits and Investment: The Q Modelmentioning

confidence: 99%

“…The linear functional form further requires an adjustment cost function that is quadratic. 10 The necessary condition is linear homogeneity of the profit function in (K t , I t ). Sufficient conditions for this to hold in the model presented here are perfect competition in output and input markets, and constant returns to scale in both production and adjustment cost technologies.…”

Section: Expected Profits and Investment: The Q Modelmentioning

confidence: 99%

The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment

Bond¹,

Klemm²,

Newton-Smith³

et al. 2004

Working Paper Series

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Evidence that cash flow has a significant effect on company investment spending, after controlling for Tobin's average Q, has often been interpreted as suggesting the importance of financing constraints. Recent work on measurement error in the Q model casts doubt on this interpretation. It is possible that the Q model may not be identified if there are 'bubbles' in stock market valuations that are both persistent over time and that are correlated with fundamental values. Cash flow may then provide additional information about expected profitability that is not captured by a poorly measured Tobin's average Q variable. We explore this hypothesis empirically using UK panel data on companies for which analysts' earnings forecasts are available from the IBES database. The results point to a severe measurement error in average Q. The paper finds that, controlling for expected profitability using analysts' earnings forecasts, cash flow becomes insignificant. This problem is particularly important in the literature that tests for an impact of financing constraints or capital market imperfections on corporate investment. Many empirical studies have added cash-flow variables to empirical models that relate investment rates to Tobin's Q, and interpreted significant coefficients on these cash-flow terms as evidence of 'excess sensitivity' of investment to the availability of internal funds. Although these findings are consistent with the presence of a cost premium for external sources of investment finance, they may also be explained, in the absence of financing constraints, by observed cash-flow or profits variables containing additional relevant information about expected future profitability not captured by Tobin's Q. Terms of use: Documents in EconStor mayRecent findings for US data suggest that much, if not all, of the significance of cash-flow variables in conventional estimates of Tobin's Q investment equations can be attributed to the failure of Tobin's Q to capture all relevant information about the expected profitability of current investment. Previous studies using UK company data have reported significant coefficients on cashflow variables, both in the context of models that relate investment to Tobin's Q, and in the context of reduced-form empirical models without explicitly forward-looking controls for expected profitability. The aim of the present study is to consider the robustness of these findings to alternative controls for expected futur...

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Financial Factors and Investment in Belgium, France, Germany and the UK:A Comparison Using Company Panel Data

Cited by 73 publications

References 0 publications

Firm Growth and Liquidity Constraints: A Dynamic Analysis

Firm Growth and Liquidity Constraints: A Dynamic Analysis

Firms’ investment decisions in response to demand and price uncertainty

The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment

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