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Title: Investment and Value: A Neoclassical Benchmark

Author(s): Janice Eberly, Sérgio Rebelo and Nicolas Vincent

Publication Date: March 2008

Keyword(s): Cash flow and Tobin's q

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Eberly, J, Rebelo, S and Vincent, N. 2008. 'Investment and Value: A Neoclassical Benchmark'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6737