What Moves Aggregate Investment?
56 Pages Posted: 1 Oct 2009 Last revised: 18 Mar 2010
Date Written: February 2010
We study the determinants of aggregate corporate investment in the U.S. We use accounting identities to develop a system in which (i) news about future cash flows and news about future discount rates are directly estimated, thus mitigating measurement problems with Tobin's q, the variable that is typically used in investment regressions; and (ii) current cash flow shocks and news about the future are jointly estimated recognizing their interdependence. We present three empirical findings. First, the lion's share of investment variation is driven by current cash flow shocks instead of news about the future. This happens because neither cash holdings nor net payout (including external financing) varies enough to break the link between earnings shocks and investment. Second, current earnings shocks are not forward-looking, suggesting that the bulk of investment is not forward-looking. Third, the same patterns hold even for the largest and most liquid firms.
Keywords: aggregate investment, variance decomposition, q-theory, earnings shocks, cash flow news, discount rate news.
JEL Classification: E22, G12
Suggested Citation: Suggested Citation