investment cash flow sensitivity and financial constraint a cluster analysis approach this article sheds light on the mixed empirical evidence concerning financial constraint and investment sensitivity to cash flow the literature suggests that measuring financial constraint is far from straightforward and we therefore propose a cluster analysis procedure to identify unambiguous groups of constrained firms we found the investment results to be highly sensitive to cash flow for financial constraint firms moreover in line with previous research our results showed that the traditional criteria used to identify financially constrained firms led to ambiguous interpretations overall our results propose that the cluster analysis can be used to encompass the various single criterion approaches thereby providing a finer measurement of the financial constraint construct and deeper insight into the relationship between investment sensitivity to cash flow and financial constraint

temporary income taxes and consumer spending both economic theory and casual empirical observation of the u s economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones but neither provides much guidance about the magnitude of this difference this paper offers new empirical estimates of this difference and finds it to be quite substantial the analysis is based on an amendment of the standard distributed lag version of the permanent income hypothesis that distinguishes temporary taxes from other income on the grounds that the former are more transitory this amendment which is broadly consistent with rational expectations leads to a nonlinear consumption function though the standard error is unavoidably large the point estimate suggests that a temporary tax change is treated as a 50 50 blend of a normal income tax change and a pure windfall over a 1 year planning horizon a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equ

the price quantity sealed bid offer auction with pro rata rationing experimental evidence this study examines a price quantity sealed bid offer auction with pro rata rationing in risky and riskless settings an asset with a known distribution of possible values is traded in the risky setting results include prices and quantities less consistent with the competitive equilibrium than with other nash equilibria frequent overrevelation of quantities a 0 73 correlation between inferred and induced risk coefficients lower forgone profits for the nonrationed side of the market and relatively low efficiencies the riskless setting in which asset values are known exhibits many of the same characteristics but to a lesser degree coauthors are ann martin david senkow and galen sevcik copyright 1993 by royal economic society

optimality of the disclosure of private information in a production exchange economy this study provides an analysis of the effects on individual welfare of information revelation in a production exchange economy it is shown that the total effect of information revelation on an agent s utility level may be decomposed into three elements a price effect a shareholding effect and a production effect through this decomposition it is demonstrated that although a pareto improvement need not result from information revelation there are perspectives from which the release can be considered beneficial the major conclusion of previous studies of information revelation in a heterogeneous beliefs economy is that the release will not result in general in an economic equilibrium pareto superior to that which would have existed without the disclosure this result by itself does not give an understanding of how information revelation affects agents utility nor does it give much guidance to those regulatory bodies charged with deciding whether or not to mandate information disclosure this study provides further insight into the effects on individual welfare of information revelation in a general production exchange economy it is shown that the total effect of information revelation on an agent s utility level may be decomposed into three elements a price effect a shareholding effect and a production effect the price effect is the change in the agent s utility caused by the change in prices resulting from the revelation of information keeping shareholdings and production fixed the shareholding effect is the change in his utility resulting from the change in his shareholdings caused by the release of information the production effect is the change in his utility caused by the change in the production plan of each firm due to the information revelation conditions are given under which the signs of these three effects will be positive or negative for a given agent the finding that the production effect is positive for some agents and negative for others is of particular interest since it is counter to a result of arrow and hirshleifer they have argued that owners of production processes gain utility by having information revealed before production plans are fixed because they are then able to adjust those plans to account for the additional information it is shown here that such a conclusion can only be made in general when owners of each production process have homogeneous beliefs finally it is

financing constraints and investment new evidence from hospital industry data this paper tests for evidence of financing constraints in the u s hospital industry the authors hypothesize that small hospitals and free standing hospitals are more likely to face financing constraints than respectively large hospitals and members of hospital chains they estimate the relationship between liquidity and investment within each cohort controlling for a variety of factors that might affect the marginal profitability of hospital investment the results provide strong evidence that small hospitals and free standing hospitals face borrowing constraints due to agency costs this supports earlier work that found evidence of financing constraints in other contexts copyright 1995 by ohio state university press

rational expectations and the aggregation of diverse information in laboratory security markets the idea that markets might aggregate and disseminate information and also resolve conflicts is central to the literature on decentralization hurwicz 1972 and rational expectations lucas 1972 we report on three series of experiments all of which were predicted to have performed identically by the theory of rational expectations in two of the three series one in which participants trade a complete set of arrow debreu securities and a second in which all participants have identical preferences double auction trading leads to efficient aggregation of diverse information and rational expectations equilibrium failure of the third series to exhibit such convergence demonstrates the importance of market institutions and trading instruments in achievement of equilibrium

the formation of price forecasts in experimental markets this study utilizes laboratory experimental methods to evaluate the empirical validity of 1 muthian rational expectations assumptions 2 an adaptive expectations model and 3 an extrapolative expectations model over 5 00 price forecasts from 146 participants in twelve experimental double auction m arkets with a cash reward structure are analyzed the forecasting objective is t hemean price over a sequence of trading periods governed by stationary market parameters the price forecasts are found to be inconsistent with strict muthian rational expectations and the extrapolative modelis not supported by the data however the forecasts generally support the adaptive expectations model copyright 1987 by ohio state university press

do fiscal variables affect fiscal expectations experiments with real world and lab data we generate observable expectations about fiscal variables through laboratory experiments using real world data from several european countries as stimuli we compare a var model of expectations for data which is presented in a fiscal frame with one for neutrally presented data we measure the degree to which participants use fiscal data for their forecasts agents expectations are found neither to be consistent with rational nor with purely adaptive expectations but instead follow an augmented adaptive scheme methodological implications of the present approach for experiments in macroeconomics are also discussed

bank connections corporate investment and crisis abstract against the backdrop of a severe financial crisis and extensive restructuring of the financial sector we investigate the evolution and determinants of connections between firms and banks and the impact of bank connections on corporate investment our study examines thai non financial companies during 1995 2000 a period straddling the east asian financial crisis of 1997 1998 before the crisis bank connections are common and associated with significantly lower sensitivity of corporate investment to internal cash flow after the crisis and following substantial changes in bank ownership and governance due to financial sector reforms and restructuring far fewer firms are bank connected and connections no longer affect investment cash flow sensitivity

tax uncertainty and investment a cross country empirical examination i introduction spanning a period of nearly 100 years of economic research a substantial body of literature has developed with the goal of explaining the behavior of investment over time 1 although many of these studies have considered the implications of tax policy for investment in an uncertain world most have also implicitly assumed that the tax policy itself does not contribute to the uncertainty the problem is that tax policy can be very uncertain in many cases 2 and to date we know little about the consequences especially from an empirical standpoint more generally empirical evaluations of uncertainty and investment are very limited compared with the development of theoretical analyses calcagnini and saltari 2000 and the case of tax uncertainty is no exception this article sets out to fill part of the intellectual void by empirically investigating the impact of volatility in effective tax rates on investment in a cross section of countries namely the 15 countries of the european union eu the united states and japan in doing so i first estimate tax rate volatility using an arch specification with data on effective capital tax rates i then provide panel regression results using the system generalized method of moments gmm sys estimator of arellano and bover 1995 see also blundell and bond 1998 which suggest that the volatility of effective tax rates on capital have a significant negative impact on investment per worker in these countries the remainder of the article proceeds as follows section ii briefly reviews the existing literature on tax policy uncertainty and investment as well as existing empirical studies of uncertainty in general and investment section iii develops the empirical model i employ to estimate the relationship between tax volatility and investment section iv then presents an analysis of effective tax rates in the eu countries the united states and japan followed by a discussion of the data and econometric issues in section v and an examination of the effects of tax rate volatility on investment in section vi section vii provides concluding remarks ii theoretical foundations tax policy uncertainty and investment although most of the voluminous literature on tax policy and investment under uncertainty ignores observed randomness in tax policy a recent set of literature has begun to explore these issues in some detail mostly through simulation 3 the basic premise underlying these studies is that because output price uncertainty tends to retard investment pindyck 1988 4 tax uncertainty might be expected to harm investment as well hassett and metcalf 1999 further credence to a negative relationship between tax uncertainty and investment is given by the business community s mantra that they cannot make plans if they don t have confidence in the tax structure bizer and judd 1989 223 these simulation studies however demonstrate that the impact of tax uncertainty depends crucially on the source and nature of the uncertainty contrary perhaps to conventional wisdom in some cases increased uncertainty can be shown to have positive effects on investment growth or welfare bizer and judd 1989 simulate the economic effects of introducing random tax policy in a dynamic general equilibrium model they find that if random tax rates or credits are serially correlated the target capital stock falls when taxes are high and rises when taxes are low their more interesting case considers independently and identically distributed random tax shocks in this case the authors find that randomness in investment tax credits generates large fluctuations in investment which have the effect of reducing both utility and production because both are concave functions as well revenue 5 they find that variance in future tax rates however is not important for long term investments and in fact raises nontrivial mounts of revenue at a welfare cost that is never more than the cost associated with raising an equivalent amount of revenue with a permanent increase in a deterministic tax rate

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

the impact of negative cash flow and influential observations on investment cash flow sensitivity estimates abstract kaplan and zingales quart j econ 112 1997 169 and clearly j finance 54 2 1999 673 diverge from the large literature on investment cash flow sensitivity by showing that investment is most sensitive to cash flow for the least financially constrained firms we examine if this result can be explained by the fact that when firms are in sufficiently bad shape incurring cash losses investment cannot respond to cash flow we find that while cleary s results can be explained by such negative cash flow observations the kaplan zingales results are driven more by a few influential observations in a small sample we also record a decline in investment cash flow sensitivity over the 1977 1996 period particularly for the most constrained firms

what drives investment cash flow sensitivity around the world an asset tangibility perspective motivated by ongoing debates on investment cash flow sensitivity icfs and its documented decline and disappearance in the u s we investigate the determinants of icfs using firm level data across 41 countries for the 1993 2013 period we document an important role of asset tangibility in explaining the patterns in icfs asset tangibility affects icfs through two channels investment intensity and cash flow persistence as the share of tangible capital investment and cash flow persistence has fallen in developed economies icfs has declined in contrast as developing economies operate with more tangible capital have higher investment rates and more persistent cash flows their icfs is more stable the results support our explanation of icfs as a reflection of capital investment intensity and income predictability rather than a measure of financial constraints

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

investment tax incentives and frequent tax reforms despite the frequency of tax changes and their potential importance to investors almost all of the analysis of tax based investment incentives assumes investors never anticipate any tax changes we depart from this approach by analyzing the historical pattern of u s corporate investment incentives over the period 1953 86 incorporating the feature of investor awareness that the tax code may change our analysis incorporates a predictive equation for future tax variables into a model of optimal investment subject to adjustment costs and uncertainty we find that expectations of future tax changes significantly affect the incentive to invest only if adjustment costs are low in this case the incentive to invest in 1986 was strong as investors are estimated to have anticipated the coming reduction in investment incentives this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

rational expectations and tax policy experimental market evidence abstract experimental markets are used to test whether 1 1 subjects forecasts of future and unknown policy conform to the rational expectations hypothesis and 2 2 subjects purchases of commodities are made in anticipation of such policy forecast results confirm previous studies that support adaptive expectations on the other hand subjects exhibited a type of as if rationality by learning to alter their commodity purchases intertemporally in anticipation of fiscal changes this ability was only slightly diminished when policy was stochastic or when the micro economies were in disequilibrium and in chaos

nash bargaining model of hmo premiums this paper estimates a model of commercial hmo premiums based on nash s axiomatic approach to bargaining between hmos and employers the bargaining models incorporate variables that measure the power of the parties to affect the division of potential gains from a contract it is found that an increase in the number of competing hmos increases the employer s bargaining power and leads to lower premiums especially for for profit hmos it is also found that employers bargaining power over non profit hmos is positively related to the ratio of the hmo s administrative expenses total expenses

investment cash flow sensitivities are useful a comment on kaplan and zingales arecent paper in this journal by kaplan and zingales reexamines a subset of erms from work of fazzari hubbard and petersen and criticizes the usefulness of investment cash eow sensitivities for detecting enancing constraints we show that the kaplan and zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique moreover we describe why their empirical classiecation system is eawed in identifying both whether erms are constrained and the relative degree of constraints across erm groups we conclude that their results do not support their conclusions about the usefulness of investment cash eow sensitivities in a recent paper in this journal kaplan and zingales 1997 hereinafter kz argue that investment cash eow sensitivities do not provide useful evidence about the presence of enancing constraints because kz use a subset of the same erms and the same regressions as fazzari hubbard and petersen 1988 hereinafter fhp and claim page 176 that fhp can legitimately be considered the parent of all papers in this literature it is appropriate that we respond based on a simple theoretical model kz reach the provocative conclusion page 211 that the investment cash eow sensitivity criterion as a measure of enancial constraints is not well grounded in theory in section i we show that the kz model does not capture the theoretical approach employed in fhp and many subsequent studies most of the kz paper attempts to show that empirical investment cash eow sensitivities do not increase monotonically with the degree of enancing constraints within the 49 low dividend erms from the fhp sample in section ii we explain why the kz classiecation of the degree of constraints is eawed in identifying both whether or not erms are constrained absolute constraints as well as the relative degree of constraints across erms as a result we argue in section iii that there is no expected ex ante pattern for the

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

educational attainment and the changing u s wage structure dynamic implications on young individuals choices we present a dynamic model of individuals educational investments that allows us to explore alternative modeling strategies for forecasting future wage distributions the key innovation we propose is an approach to forecasting that relies only on the information that would be available at the actual time decisions are made and which incorporates the role of parameter uncertainty into the decision making process we compare the performance of our method with alternative models of forecasting behavior based on cps data over the period 1964 2004