Journal article
On solving endogeneity with invalid instruments: an application to investment equations
Journal of the Royal Statistical Society. Series A, Statistics in society, Vol.181(3), pp.689-716
06/2018
DOI: 10.1111/rssa.12313
Abstract
Regression models relating investment demand with firms'Tobin's q and cash flow are fraught with measurement errors which, in turn, cause endogeneity bias. We propose an alternative solution to this problem based on modelling the interaction between the endogenous Tobin's q and the error term in the investment equation as a function of lagged values of Tobin's q. We then study the identification conditions and asymptotic properties of the resulting estimator. Our analysis of a panel of US firms reveals a larger effect of Tobin's q on firms' investment demand than that obtained by using available estimators in the literature. Moreover, the estimates highlight the importance of cash flow. We find mixed evidence on the relationship between investment demand and firms' cash flow with respect to different measures of financial constraints. Nevertheless, this evidence is more supportive of the view that firms' cash flows have a weaker correlation to investment demand when financial conditions tighten.
Details
- Title: Subtitle
- On solving endogeneity with invalid instruments: an application to investment equations
- Creators
- Antonio F. Galvao - University of ArizonaGabriel Montes-Rojas - Universidad de Buenos AiresJose Olmo - University of SouthamptonSuyong Song - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Journal of the Royal Statistical Society. Series A, Statistics in society, Vol.181(3), pp.689-716
- DOI
- 10.1111/rssa.12313
- ISSN
- 0964-1998
- eISSN
- 1467-985X
- Publisher
- Wiley
- Number of pages
- 28
- Language
- English
- Date published
- 06/2018
- Academic Unit
- Economics; Finance
- Record Identifier
- 9984380455102771
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