This paper presents evidence supporting the theory that problems of asymmetric information in debt markets affect financially unhealthy firms' ability to obtain outside finance and, consequently, their allocation of real investment expenditure over time. The author tests this hypothesis by estimating the Euler equation of an optimizing model of investment. Including the effect of a debt constraint greatly improves the Euler equation's performance in comparison to the standard specification. When the sample is split on the basis of two measures of financial distress, the standard Euler equation fits well for the a priori unconstrained.groups, but is rejected for the others.

We estimate a dynamic investment model in which firms finance with equity, cash, or debt. Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds flowing to and from these activities come from investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Our parameter estimates imply that misvaluation induces larger changes in financial policies than investment. The investment responses are strongest for small firms but nonetheless modest. Managers' rational responses to misvaluation increase shareholder value by up to 4%.

[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.]

[We examine whether spin-offs or divestitures cause improvements in conglomerate investment efficiency. At issue are endogeneity of these restructuring decisions and correct measurement of investment efficiency. Endogeneity is a problem because the factors that induce firms to spin off or divest divisions may also improve investment efficiency; measurement error is a problem because efficiency measures employ Tobin's q as a noisy proxy for investment opportunities. We find important differences between firms that divest or spin off and a control sample. After accounting for these differences and for measurement error in q, we find no evidence of improvements in investment efficiency.]

We construct an index of firms' external finance constraints via generalized method of moments (GMM) estimation of an investment Euler equation. Unlike the commonly used KZ index, ours is consistent with firm characteristics associated with external finance constraints. Constrained firms' returns move together, suggesting the existence of a financial constraints factor. This factor earns a positive but insignificant average return. Much of the variation in this factor cannot be explained by the Fama-French and momentum factors. Cross-sectional regressions of returns on our index and other firm characteristics show that constrained firms earn higher returns and that the financial-constraints effect dominates the size effect.

This paper uses firm-level panel data to investigate the proposition that reliquification is an important phase of the business cycle. It occurs late during recessions and is characterized by prolonged reductions in real investment, caused by firms needing to accumulate assets in order to improve their financial health. The paper concludes that a buildup of assets precedes an increase in investment. This effect is more important for firms without access to organized bond markets and during recession years.

[We test whether stock market mispricing or private investor information in stock prices affects corporate investment. We develop an econometric methodology that disentangles stock-price movements that are relevant for investment from those that are not. We combine this decomposition with proxies for private information and mispricing to devise unbiased tests for the effects of mispricing and information on investment. We depart from much of the literature by finding that stock market mispricing does not affect investment, especially that of large firms and firms subject to mispricing. In contrast, we confirm previous evidence that managers incorporate private investor information when making investment decisions.]

Armstrong et al. (2022) review the various econometric methods that have been used to draw causal inference in the accounting literature and offer an alternative method for conducting research when causal methods are not applicable. This discussion provides background for the emphasis on causal inference in accounting. It also draws parallels between the authors' proposed quasi-causal method and the structural estimation methods that have been used in finance and that are starting to be used in accounting.

Do external finance constraints affect the timing of large investment projects? Simulations of a model with fixed capital-stock adjustment costs establish the hypothesis that external finance constraints lower a firm's investment hazard: the probability of undertaking a large project today as a function of the time since the last project. Hazard model estimation that controls for productivity and adjustment costs supports this hypothesis. Small firms that distribute cash to shareholders have higher hazards than small firms that do not; very small firms have lower hazards than small firms; small stand-alone firms have significantly lower hazards than small segments of conglomerates.