Affiliation:
1. Wharton School, University of Pennsylvania and National Bureau of Economic Research, USA
2. Anderson School, UCLA and National Bureau of Economic Research, USA
Abstract
Abstract
We derive analytic solutions for the valuation, optimal investment, and optimal payout of a financially constrained firm. While marginal $q$ and average $q$ would be identically equal in the absence of financial constraints, they differ when financial constraints bind. We use analytic solutions to characterize the properties of regressions of investment on average $q$ and cash flow. The coefficient on cash flow is positive, but does not isolate the impact of the financial constraint, since it also partially reflects the impact of persistent profitability. The coefficient on average $q$ understates the impact of persistent profitability.
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Finance,Accounting
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