What Moves Aggregate Investment?

56 Pages Posted: 1 Oct 2009 Last revised: 18 Mar 2010

See all articles by Long Chen

Long Chen

Luohan Academy; Cheung Kong Graduate School of Business

Zhi Da

University of Notre Dame - Mendoza College of Business

Borja Larrain

Pontificia Universidad Catolica de Chile

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

Chen, Long and Da, Zhi and Larrain, Borja, What Moves Aggregate Investment? (February 2010). Available at SSRN: https://ssrn.com/abstract=1480783 or http://dx.doi.org/10.2139/ssrn.1480783

Long Chen (Contact Author)

Luohan Academy ( email )

No. 556, Xixi Road, Z Space
Xihu District
Hangzhou, Zhejiang 310013
+86-0571-2688-8888-75520 (Phone)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Borja Larrain

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

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