Market power exercised by firms has become central to macroeconomics. Recent theoretical work highlights the importance of the relation between market power and inflation. We examine this relation for individual firms in eleven U.S. industries. Our econometric framework exploits restrictions from dynamic theory and information from financial markets to generate quantitative evidence on the responsiveness of market power to inflation. We find that inflation usually has a positive effect on market power. This relation is heterogeneous across the eleven industries, and statistically significant positive relations are concentrated in industries with little market power.

The results of a number of theoretical papers lead to the hypothesis that financial variables affect capital sp ending because of asymmetric information in capital markets. The auth ors review the relevant theory and test this hypothesis with a large sample of firm data. The results show that financial variables such a s cash flow and interest expense add significant explanatory power to investment equations based on Dale Jorgenson's neoclassical model, w ith a CAPM specification for the firm's cost of capital, and a sales- accelerator model. The analysis, therefore, links recent theoretical work on capital markets to long-standing empirical debates in the inv estment literature. Copyright 1987 by MIT Press.

This study provides new evidence of the importance of financing constraints for explaining the dramatic cycles in inventory investment. We compare the empirical performance of different financial variables (coverage ratio, cash stocks, and cash flow) used in previous research to test for the presence of financing constraints. The comparison is undertaken in a common framework with an identical sample and high-frequency (quarterly) firm panel data. Cash flow is much more successful than cash stocks or coverage in explaining the facts about inventory investment across firm size, different inventory cycles, and different manufacturing sectors.

ABSTRACT The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D. U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high‐tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth.