Governance problems have a direct and immediate impact on the effective discount rate guiding investment decisions. Information from a transformed net present value rule and variation in firm-level panel data “reveal” the effective discount rate influencing investment. For the firms most likely to be affected by Jensen agency problems, investment behavior appears to be guided by discount rates less than the market rate by 350–400 basis points. This wedge is reduced for firms with a concentrated ownership structure. Firms facing free cash flow problems have a stock of fixed capital approximately 7–22% higher than would prevail under value maximizing behavior.

Simon van Norden, Huntley Schaller, The Predictability of Stock Market Regime: Evidence from the Toronto Stock Exchange, The Review of Economics and Statistics, Vol. 75, No. 3 (Aug., 1993), pp. 505-510

The two key questions which motivate our work are: do bubbles exist (in the sense that stock market prices do not always correspond to the present value of expected future profitability) and, if bubbles exist, do they have an effect on business fixed investment? The case of Japan is particularly interesting because of the dramatic movements in the Japanese stock market and the wide perception that these were associated with a bubble. We use a variety of techniques to analyze these questions. Fist, we examine financing and investment patterns to gauge firms' reactions to the 1980s stock market run-up. Second, we test subsets of the orthogonality conditions associated with the empirical first-order conditions for fixed investment. Third, we use a linear projection to decompose stock market prices into fundamental and bubble components, allowing us to carry out parametric estimates of the effect of the bubble component on fixed investment. The data strongly suggest that there was a bubble that had an economically important statistically significant effect on business fixed investment in Japan.;

Serena Ng, Huntley Schaller, The Risky Spread, Investment, and Monetary Policy Transmission: Evidence on the Role of Asymmetric Information, The Review of Economics and Statistics, Vol. 78, No. 3 (Aug., 1996), pp. 375-383

This paper presents a model that provides an explanation, based on regime switching in the real interest rate and learning, of why tests based on stock-adjustment models, Euler equations, or decision rules—which emphasize short-run fluctuations in inventories and the interest rate—are unlikely to uncover a negative relationship between inventories and the real interest rate. The model, however, predicts that inventories will respond to long-run movements, that is, to regime shifts in the real interest rate. Tests emphasizing cointegration techniques confirm this prediction and show a significant long-run relationship between inventories and the real interest rate.