We assemble a new, quarterly panel dataset that links firms’ investment and financing to their employment and wages. In the data, wages and leverage are negatively related, both cross-sectionally and within firms. This pattern contradicts models in which firms insure workers against unemployment risk. We reconcile this fact with a model that integrates factor adjustment frictions and wage bargaining with costly external financing. In the model, the probability of default rises with debt. Because default incurs deadweight costs, the expected surplus over which firms and workers bargain falls, thus depressing wages. We show that raising financing costs reduces employment and wages, in line with recent reduced-form evidence.

Which agency problems affect corporate cash policy? To answer this question, we estimate a dynamic model of finance and investment with three mechanisms that misalign managerial and shareholder incentives: limited managerial ownership of the firm, compensation based on firm size, and managerial perquisite consumption. We find that perquisite consumption critically impacts cash policy. Size‐based compensation also matters, but less. Firms with lower blockholder and institutional ownership have higher managerial perquisite consumption, low managerial ownership is a key factor in the secular upward trend in cash holdings, and agency plays little role in small firms' substantial cash holdings.

Cities exist because of the productivity gains that arise from clustering production and workers, a process called agglomeration. How important is agglomeration for aggregate growth? This paper constructs a dynamic stochastic general equilibrium model of cities and uses it to estimate the effect of local agglomeration on aggregate growth. We combine aggregate time-series and city-level panel data to estimate the model's parameters via generalized method of moments. The estimates imply a statistically and economically significant impact of local agglomeration on the growth rate of per capita consumption, raising it by about 10%.

We test whether smooth industry-level investment dynamics result from explicit aggregation of asynchronous and possibly lumpy firm-level investment. We compare the deviations of optimal from actual firm behavior across industries categorized by their ratios of idiosyncratic uncertainty to the sum of idiosyncratic and aggregate uncertainty. The deviations are represented by the residuals of a cointegrating regression that is derived from the firm's first-order condition under no adjustment costs. In support of models with asynchronous firm decisions, we find a significant negative relationship across industries between idiosyncratic uncertainty and the persistence of these residuals.

We examine how relative performance evaluation (RPE) affects industry competition—a question relevant for corporate boards interested in incentivizing executives. Using U.S. airline data, we estimate a dynamic game of competition between heterogeneous firms in an oligopolistic market, with managers incentivized by RPE contracts. While RPE can induce a firm to compete more intensely by smoothing compensation, it also amplifies a firm’s cost efficiency relative to its peers and can weaken competition from inefficient firms. The first effect dominates in small markets and the second in median-sized markets. RPE has little effect in large, highly profitable markets.

We construct novel measures of financial constraints using textual analysis of firms’ annual reports and investigate their impact on stock returns. Our three measures capture access to equity markets, debt markets, and external financial markets in general. In all cases, constrained firms earn higher returns, which move together and cannot be explained by the Fama and French (2015) factor model. A trading strategy based on financial constraints is most profitable for large, liquid stocks. Our results are strongest when we consider debt constraints. A portfolio based on this measure earns an annualized risk-adjusted excess return of 6.5%. Received April 4, 2016; editorial decision December 17, 2017 by Editor Andrew Karolyi.

Threshold events are discrete events triggered when an observable continuous variable passes a known threshold. We demonstrate how to use threshold events as identification strategies by revisiting the evidence in Rauh (2006, Investment and financing constraints: Evidence from the funding of corporate pension plans, Journal of Finance 61, 33–71) that mandatory pension contributions cause investment declines. Rauh's result stems from heavily underfunded firms that constitute a small fraction of the sample and that differ sharply from the rest of the sample. To alleviate this issue, we use observations near funding thresholds and find causal effects of mandatory contributions on receivables, R&D, and hiring, but not on investment. We also provide useful suggestions and diagnostics for analyzing threshold events.

Why do corporations accumulate liquid assets? We show theoretically that intertemporal trade‐offs between interest income taxation and the cost of external finance determine optimal savings. Intriguingly, we find that, controlling for Tobin's q , saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash‐flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many forces to be used to measure external finance constraints.

We develop a simple theoretical argument that generates testable predictions about how disagreement affects corporate investment and find strong empirical support for these predictions. Investment is negatively related to a proxy for disagreement, after controlling for Tobin’s q, and after dealing with the fact that Tobin’s q and our disagreement proxy contain measurement error. This proxy is unrelated to traditional indicators of asymmetric information. We also find that variation in disagreement is an important component of the portion of the variation in Tobin’s q that matters for investment, and that disagreement affects investment and Tobin’s q more if the firm has greater financial flexibility.

We compare the ability of three measurement error remedies to deliver unbiased estimates of coefficients in investment regressions. We examine high-order moment estimators, dynamic panel estimators, and simple instrumental variables estimators that use lagged mismeasured regressors as instruments. We show that recent investigations of this question are largely uninformative. We find that all estimators can perform well under correct specification, all can be biased under misspecification, and misspecification is easiest to detect in the case of high-order moment estimators. We develop and demonstrate a minimum distance technique that extends the high-order moment estimators to be used on unbalanced panel data. Published by Oxford University Press 2011., Oxford University Press.