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The underinvestment and overinvestment hypotheses: An
analysis using panel data
Artur MORGADO
Instituto Politcnico de Coimbra (Portugal)
Julio PINDADO
Universidad de Salamanca (Spain)
Address for correspondence:
Julio Pindado
Dpto. de Administracin y Economa de la Empresa
Campus Miguel de Unamuno
Universidad de Salamanca
37007 Salamanca
Telfono: (923) 294400
294640 Ext. 3506
Fax: (923) 294715
E-mail: [email protected]
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The underinvestment and overinvestment hypotheses: An analysis
using panel data
ABSTRACT
In this paper we study the relationship between firm value and investment in order to
test the underinvestment and overinvestment hypotheses. The results obtained, using
panel data methodology as the estimation method, indicate that the abovementioned
relation is quadratic, whichimplies that thereexists an optimal level of investment. As a
consequence, firms that invest less than the optimal level suffer from an
underinvestment problem, while those firms that have a level of investment higher than
the optimum suffer from an overinvestment problem. The aforementioned quadratic
relation is maintained when firms are classified depending on their investment
opportunities. Moreover, in accordance with the theory, those firms with valuable
investment opportunities maintain an optimal level of investment higher than that of
those whose investment opportunities are of low quality.
1. INTRODUCTION
In a world of perfect capital markets, Modigliani and Miller (1958) demonstrated that
investment, financing and dividend decisions are independent. During the last decades,
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however, the empirical evidence has shown that those decisions are interdependent.
Accordingly, some theories that explain the previous evidence have been developed.
These theories are based on capital-market imperfections; in particular, with respect to
the investment decision, the existence of asymmetric information between the main
stakeholders is the foremost imperfection.
The role of the asymmetry of information in investment decisions has as its
primary basis the theoretical works of Jensen and Meckling (1976), Myers (1977) and
Myers and Majluf (1984). The first two papers emphasize the consequences of the
existence of post-contract asymmetric information between shareholders and
bondholders, while the paper of Myers and Majluf (1984) emphasizes the role of the
pre-contract asymmetric information between current and prospective shareholders. All
the abovementioned papers show that informational asymmetries may lead to some
investment projects with a positive net present value (NPV) not being undertaken. A
second foundation in the study of inefficient investment decisions is the work of Jensen
(1986). This paper, starting from the hypothesis of the existence of asymmetric
information between managers and shareholders, introduces the so-called problem of
overinvestment, as a basic argument of his free cash flow theory. According to this
theory there can be negative NPV investment projects that end up being completed. In this way, whenever an underinvestment process or an overinvestment process
arises the value of the firm will be affected. Thus, it is worthwhile to hypothesize that
the relationship between investment and firm value is not monotonic but rather
increases up to one determined optimal level and decreases after this level. Firms will
first undertake those investment projects with a positive NPV and the firm value will
grow until the positive NPV projects become exhausted. Those firms that continue
investing will undertake negative NPV projects and, hence, their market value will
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decrease. In this context, levels lower than the optimum confirm the underinvestment
hypothesis and levels higher than the optimum, the overinvestment hypothesis.
To test the main hypothesis put forward in our paper, that is, that the relationship
between firm value and investment is quadratic rather than linear, we havedeveloped a
model that relates firm value and investment, incorporating a quadratic term of
investment in the equation. The results obtained in the estimation of this model allow us
to conclude that the abovementioned hypothesis is verified. We also study the
relationship between firm value and investment depending on the quality of investment
opportunities. In this case, the results also confirm the previous hypothesis and show
that the optimal level of investment is higher for those firms with valuable investment
opportunities.
The remainder of the paper is organized as follows. Section II describes the
underinvestment and overinvestment hypotheses in orderto develop a model that relates
firm value and investment in Section III. In Section IV we present the database, explain
the estimation method and discuss the results. Finally, our conclusions are presented in
Section V.
2. THE UNDERINVESTMENT AND OVERINVESTMENTHYPOTHESES
In imperfect capital markets, financing and investment decisions are not independent. In
fact, capital-market imperfections, such as informational asymmetries and agency costs,
could lead to either underinvestment or overinvestment processes, that is, not all
positive NPV projects will be undertaken and some negative NPV projects will not be
rejected. Informational asymmetries contribute to several conflicts between the main
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stakeholders, which give rise to either overinvestment or underinvestment processes.
Next, we describe these topics and how they are connected, following Figure I.
Given the limited liability of shareholders, they are encouraged to invest in
riskier investment projects than those initially defined in the loan conditions. This is due
to the fact that riskier projects are expected to give larger benefits which will be mainly
enjoyed by the shareholders; whereas if large losses occur, these will be passed on to
the bondholders (Jensen and Meckling, 1976). In this case, the well-known problem of
asset substitution arises. When post-contract asymmetric information exists, and given
the impossibility of developing full contracts, such asymmetry of information could
induce costs for shareholders, since bondholders discount the prospective substitution of
assets. Thus, either the rise in interest rates, credit rationing or the imposition of limiting
conditions in investment or financing terms, may limit the capacity of the shareholders
to develop their investment projects. This problem of asset substitution between
shareholders and bondholders is, therefore, one of the mechanisms that lead to
underinvestment.
The conflict between shareholders and bondholders also gives rise to a problem
of underinvestment by moral hazard. Given the priority of bondholders in case of
bankruptcy, shareholders may find themselves in a situation where bondholders
appropriate part of the value created. Therefore, shareholders will have an incentive to
abandon NPV projects whenever the NPV is lower than the amount of debt issued
(Myers, 1977). Thus, bondholders will try to prevent those suboptimal investment
policies being adopted by using several mechanisms, such as debt covenants, the
reduction of the stated periods of loan, and greater supervision and control. However, all
these procedures only imply a slight mitigation of the problem and, moreover, their cost
is ultimately borne by the shareholders.
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Additionally, the conflict between shareholders and bondholders also gives rise
to a problem of underinvestment by adverse selection. This problem arises from the
higher premium required by bondholders, since they do not have enough information to
distinguish the quality of the different investment projects of the firm (Stiglitz and
Weiss, 1981). Thus, if the investment outlay of all positive NPV projects is higher than
the internal funds available, the firm might forgo those investment projects rather than
issue risky debt.
The conflict between current and prospective shareholders may also lead to
underinvestment caused by adverse selection. Myers and Majluf (1984) proved that, due
to pre-contract asymmetric information between prospective and current shareholders in
relation to the investment projects and the assets in place, the firm might forgo positive
NPV projects. Owing to informational asymmetries the prospective shareholders are
unaware of the firm value and raise the price at which they offer funds. With this price
the existing shareholders may lose more if the investment projects are undertaken than
they would if the investment projects are abandoned.
In summary, the conflicts between bondholders and shareholders and the current
and prospective shareholders may lead to underinvestment processes.
Moreover, the overinvestment process arises from the conflict between
managers and shareholders. When informational asymmetries exist, and taking into
account that the mechanisms used to align the interests between shareholders and
managers may not be fully efficient, managers may use the free cash flow to undertake
negative NPV projects in their own best interest (Jensen, 1986). Note that free cash flow
is cash flow in excess of that required to fund all positive NPV projects, hence
managers waste these funds instead of paying them to shareholders. Managers will have
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incentives to overinvest because of the pecuniary and non-pecuniary benefits associated
with the larger dimension of the firm (Jensen, 1986; Stulz, 1990).
The empirical evidence on the underinvestment hypothesis was initially
developed through the successive studies on the sensitivity of investment to cash flow,
especially after the methodological innovative study by Fazzari et al. (1988).1 Almost
all these studies 2 find a strong dependence of investment on the availability of internal
funds, this dependence being interpreted as evidence of the underinvestment problem by
adverse selection. However, the positive relationship found between investment and
cash flow may not arise only from the underinvestment problem by adverse selection. It
may also indicate that high levels of cash flow allow managers to undertake negative
NPV projects, which would not happen if they had to raise external funds and explain
the rationality of their investments. The study by Vogt (1994) allows us to distinguish
both effects and obtain empirical evidence of both problems (underinvestment and
overinvestment) depending on the different features of the firms. Thus, the
overinvestment hypothesis is confirmed whenever the positive relationship between
investment and cash flow is maintained for firms whose investment opportunities are of
low quality. On the contrary, for firms with valuable investment opportunities, a
positive relationship indicates an underinvestment problem.
There are also several papers that obtain empirical evidence on each of the
hypotheses using the event study methodology. These studies analyse the reaction of the
market to announcements of investment decisions (see for example Doukas, 1995;
Vogt, 1997; Chen and Ho, 1997) or to announcements of dividend decisions (see for
example Lang and Litzenberger, 1989), distinguishing the firms according to their
investment opportunities and/or free cash flow level. In general, these studies provide
evidence that abnormal returns are larger for the firms with valuable investment
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opportunities. However, the evidence on the free cash flow effect is not so clear (see
Chen and Ho, 1997).3
The underinvestment and overinvestment problems have also been studied
through other perspectives. For instance, Lang et al. (1996) obtain favourable evidence
on the overinvestment hypothesis, when finding that high ratios of indebtedness limit
the development of investment projects only for the firms whose investment
opportunities are of low quality. Nohel and Tarhan (1998) also find evidence in
accordance with the free cash flow theory by studying the effect of the reacquisition of
shares on the operational performance of firms. Adedeji (1998) obtains mixed evidence
on the underinvestment hypothesis by studying the simultaneous interrelation between
the investment, financing and dividend decisions. Finally, Miguel and Pindado (2001)
conclude that, in a context of asymmetric information, firms are worried either by the
underinvestment problem or by the overinvestment problem depending on their cash
flow and debt levels, thus corroborating the trade-off between underinvestment and
overinvestment considered by Stulz (1990).
As a consequence of the abovementioned empirical evidence, nowadays there is
a generalized consensus on the distortions that informational asymmetries introduce into
the investment decision. Thus, contrary to the hypothesis of perfect capital markets
maintained by Modigliani and Miller (1958), informational asymmetries could lead to
underinvestment or overinvestment processes. Both problems will affect the firms
value since, on the one hand, positive NPV projects will not be undertaken and, on the
other hand, negative NPV projects will not be rejected. Hence, when a firm becomes
affected by an underinvestment problem, if an additional investment is undertaken the
market value should increase. If the problem is one of overinvestment, any additional
investment must negatively affect the wealth of the shareholders. Assuming as a
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reasonable hypothesis that the investment projects of greater NPV will always be
undertaken in first place, even in the managers own best interest (Stulz, 1990), the
market value will increase until a certain investment level is reached. After that
optimum the market value will start to decrease. Therefore, the main hypothesis to
prove in our paper is: the relationship between market value and investment is
quadratic, implyingthat there exists an optimal level. Levels below the optimal one will
confirm the underinvestment hypothesis while higher levels will confirm the
overinvestment one (see Figure II).
3. SPECIFICATION OF THE MODEL
In order to test the hypothesis mentioned in the previous section, we develop a model
that relates the value of the shares of the firm to its main financial decisions, taking into
account the behaviour of the investment variable described above:
(V it /Ki,t-1)=0 + 1(I it /Ki,t-1) + 2(I it /K i,t-1)2 + 3(B it /Ki,t-1)+ 4(D it /Ki,t-1)+ eit
(1)
where Vit is the market value of the shares of firm i at the end of period t, Iit is the
investment undertaken by firm i in period t, Bit is the increment of the market value of
the long-term debt, Dit are the dividends paid in period t, and finally Ki,t-1 is the
replacement value of the assets at the end of period t-1.4
The model defined in equation (1) relates investment and firm value, controlling
the other two main financial decisions of the firm, that is, financing and dividends
decisions, which could affect firm value due to the existence of market imperfections.
The expected relationship between increment of debt and firm value is positive, since,
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whenever the bankruptcy probability is not very high, an increment of debt will have a
positive effect on the wealth of the shareholders because new debt means obtaining new
tax-shields. The expected relationship between dividends and firm value is also positive,
because in addition to the possible effects in relation to the imperfections, dividends are
a source of value creation for the shareholders of the firm. Note that the well-known
capital-market arbitrage condition stipulates that the net after-tax return for shareholders
may be obtained in two ways: from capital appreciation and from current dividends (see
Whited, 1992; Blundell et al., 1992).
As we have commented in the previous section, the overinvestment and
underinvestment processes are not exclusive and must affect the market value of the
firm. Thus, if a firm is facing by an underinvestment problem, a marginal increase in
investment must positively affect the market value of the shares, while the effect will be
negative if the problem is one of overinvestment. Therefore, an optimal level of
investment will exist, which is reflected in the model since weincorporated in equation
(1) the investment variable and its square.
Consequently, if, after estimating the model, we differentiate the firm value
variable with respect to the investment variable, we would obtain:
+=
1
21
1
12
it
it
it
it
it
it
K
I
K
I
K
V
(2)
then, making the first derivative equal to 0 and solving for the investment variable, we
obtain:
2
1
1 2
=
it
it
K
I(3)
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Finally, if the second partial derivative of the firm value variable with respect to
the investment variable is negative, the value obtained from equation (3) will be a
maximum.
2
1
2
1
2
2=
it
it
it
it
K
I
K
V
(4)
Accordingly, in order to obtain a maximum from equation (3), 2 should be
negative. Also, for the optimal level of the investment determined in equation (3) to be
positive, 1 should be positive. Consequently, if the signs of these coefficients hold
when equation (1) is estimated our main hypothesis will be proved.
If the previous hypothesis is verified, we can also, in agreement with the theory,
put forward an additional hypothesis: that the optimal level of investment will be
different depending on the quality of investment opportunities. To be exact, the
abovementioned optimal level will have to be higher for those firms that have valuable
investment opportunities. In order to test this hypothesis, we define a dummy variable
for each firm, DQi, which is equal to 1 for those firms that during the period have an
average Tobins q less than one, and 0 otherwise. Thus, we extended the specification of
the model in equation (1) by incorporating a dummy variable that interacts with the linear
and quadratic terms of the investment variable. This dummy variable represents the
quality of investment opportunities. Therefore, the new model would be as follows:
(V it /Ki,t-1) = 0 + (1 + 1DQ i) (I it /Ki,t-1) + (2+ 2DQ i) (I it /Ki,t-1)2 + 3(B it /Ki,t-1)+
4 (Dit/Ki,t-1) + eit (5)
Thus, we classify the firms in two groups: when Tobins q is less than 1, firms
are classified as non-valuable project firms (hereafter, NVP firms), otherwise they are
classified as valuable project firms (hereafter, VP firms). In this new model, 1 and 2
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are the coefficients that define the optimal level of investment for VP firms, since for
those firms DQi is equal to 0. Hence, the optimal level for VP firms will be obtained
using equation (3). However, for NVP firms DQi takes the value of 1, therefore the
optimal level will be obtained through the following equivalent equation:
( )22
11
1 2
++
=
it
it
K
I(6)
Based on this new model, as it appears in Figure III, we therefore put forward
the following additional hypothesis: the optimal level of investment for VP firms,
(Iit/Ki,t-1)q>1
, will be higher than the optimal level of investment for NVP firms, (Iit/Ki,t-
1)q
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an individual effect, i. Hence, we took first differences of the variables in order to
eliminate the individual effect. We also included the dummy variables dt to measure the
time effect, so as to control the effect of macroeconomic variables on firm value.
Consequently, we split the error term into three components: the individual effect, i,
the time effect, dt, and, finally, the random disturbance, it. As a result, the final
specification of the models to estimate is as follows:
(Vit /Ki,t-1) = 0 + 1(I it /Ki,t-1) + 2(I it /Ki,t-1)2 + 3(B it /Ki,t-1)+ 4(D it /Ki,t-1)+ dt +
i + it (7)
(Vit /Ki,t-1)=0 + (1 + 1DQ i) (I it /Ki,t-1) + (2+ 2DQ i) (I it /Ki,t-1)2
+ 3(B it /Ki,t-1)+
4 (Dit/Ki,t-1) + dt + i + it (8)
The estimation was carried out using DPD98 for GAUSS written by Arellano
and Bond (1998). In order to check for potential mis-specification of the models we use
the Sargan statistic of over-identifying restrictions, which tests for the absence of
correlation between the instruments and the error term. Another specification test used
is the m2 statistic, developed by Arellano and Bond (1991), to test for lack of second-
order serial correlation in the first-difference residuals. Finally, besides the
aforementioned specification tests, Table 4 provides two Wald tests: the first (z1) is a
test of the joint significance of the reported coefficients, while the second (z2) is a test of
the joint significance of the time dummies. As can be seen in Table 4, our models pass
all the abovementioned tests.
4.3 RESULTS
The results obtained verify our main hypothesis. As can be seen in column I of Table 4,
1 is positive and 2 is negative, both coefficients being significant. These results
indicate that the relationship between investment and firm value is quadratic rather than
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linear. That is, a marginal increase in investment has a positive effect on the wealth of
shareholders whenever the optimal investment level has not yet been exceeded. This
level reflects the beginning of the exhaustion of positive NPV projects.
According to the results shown in column I of Table 4 and substituting the
values obtained for the coefficients 1 and 2 into equation (3), we find that the optimal
level of investment is 0.4558. This implies that, in general terms, firms keep investing
in positive NPV projects until this level is reached, and hence the value of their shares
keeps rising. However, once this optimal level has been reached firms undertake
negative NPV projects and, thus, the value of their shares decreases. In this way, the
results obtained confirm both the underinvestment and the overinvestment hypotheses.
The former for those firms whose level of investment is lower than the optimum,
therefore located in Figure II to the left of (Iit/Ki,t-1)*. The latter for those firms whose
investment level is located to the right of (Iit/Ki,t-1)*.
The fact that the investment level is located to the left of the optimumindicates
that the firms suffer from financial constraints which do not allow them to undertake all
the positive NPV projects at any time. Therefore, these firms are facing an
underinvestment process. The financial constraints suffered by those firms are due to
the higher premium required by bondholders or prospective shareholders. This higher
premium is due to either the conflict between shareholders and bondholders or the
conflict between current and prospective shareholders. On the contrary, when the firms
investment level is located to the right of the optimum, this indicates that the firms are
undertaking negative NPV projects. These negative NPV investments do not increase
the wealth of shareholders. Hence, they are only undertaken to maximize the objective
function of the managers, and so firms are in the face of an overinvestment process. The
overinvestment process arises when managers waste free cash flow instead of paying
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these funds to shareholders; this behaviour is caused by the conflict between
shareholders and managers.
All the other variables in the model also show significant coefficients. The
increment of debt variable has a positive coefficient, due to the new tax-shields
obtained. The coefficient for the dividends variable is also positive. This latter result
indicates that the dividends paid in the period are one of the sources of value creation
for shareholders, as stipulated in the capital-market arbitrage condition.
Column II of Table 4 provides the results of the estimation of model II,
developed to study the relationship between firm value and investment depending on
the quality of investment opportunities. Before discussing these results let us point out
that 1 and 2 are, respectively, the coefficients for the investment and the square
investment variables for VP firms, while in the case of NVP firms the coefficients for
the abovementioned variables are (1+1) and (2 +2). Therefore, as 1 is positive and
2 is negative, we can affirm that the relationship between firm value and investment is
quadratic for VP firms. However, before interpreting the coefficients for NVP firms, we
must perform two linear restriction tests in order to check whether these coefficients are
significantly different from zero. As Table 4 shows, the null hypothesis H0: 1+1 = 0 is
rejected, since the t1 statistic takes the value of 32.3175, and the null hypothesis H0: 2
+2= 0 can also be rejected, since the t2 statistic takes the value of 35.4839. Therefore,
both (1+1)=0.3869 and (2 +2)=0.6867 are significantly different from zero, and their
signs allow us to confirm the previous quadratic relationship also for NVP firms.
Furthermore, by substituting the values obtained for 1 and 2 in equation (3), we find
that the optimal level of investment for VP firms is 0.7774. The optimal level of
investment for NVP firms is 0.2837, as can be verified by substituting (1+1) and (2
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+2) in equation (6). These results support the relationship between investment and firm
value posed in model I, where the optimal level of investment obtained for the whole
sample of firms is 0.4558. Thus, in agreement with our second hypothesis, the following
is verified: (Iit/Ki,t-1)q1. Finally, in model II, the significance
and sign of the other variables remain, thus confirming the results obtained in model I.
5. CONCLUSIONS
This paper tests the following main hypothesis: the relationship between firm value and
investment is quadratic, which implies that an optimal level of investment exists; levels
lower than the optimum confirm the underinvestment hypothesis and higher levels the
overinvestment one.
The results obtained allow us to conclude that the abovementioned hypothesis is
fulfilled. In fact, there exists an optimal level of investment, which is the level where the
positive NPV projects are exhausted. Therefore, firms that exceed that value find
themselves in an overinvestment process, created by the divergence of interests between
shareholders and managers and facilitated by the existence of asymmetric information.
In contrast, firms that do not reach that value find themselves in an underinvestment
process, which implies that the existence of asymmetric information increases the price
of the external financial resources, hence the firms forgo positive NPV projects. In this
case, the underinvestment process is also facilitated by the existence of asymmetric
information but it arises from the conflict between shareholders and bondholders and
the conflict between current and prospective shareholders.
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Finally, our study also allows us to conclude that firms with valuable investment
opportunities can undertake larger investments until reaching the optimal level, whereas
firms without valuable investment opportunities have an optimal level of investment far
below that of the previous ones, which confirms an exhaustion of their positive NPV
projects.
.
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Data, The Journal of Finance, 47, 1425-60.
FOOTNOTES1
Hubbard (1998) offers an excellent review of those studies.
2The exceptions are the studies by Kaplan and Zingales (1997) and Cleary (1999).
3See Del Brio et al. (2000) for a more complete overview and additional evidence.
4A more detailed definition of the variables can be found in the appendix.
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TABLE 1
STRUCTURE OF THE SAMPLE
Number of annual observationsper company Number ofcompanies Number ofobservations
10 76 760
9 22 198
8 24 192
7 5 35
6 8 48
Total 135 1,233
TABLE 2SAMPLE DISTRIBUTION BY SUB-SECTOR CLASSIFICATION
Sub-sectors Number of
companies
% of
companies
Energy 14 10.37
Extractive Industry 3 2.22
Transport Industry 14 10.37
Textile Industry 3 2.22
Building 22 16.30
Trade and Services 35 25.93
Food Industry 21 15.56Metal Industry 8 5.93
Chemical Industry 9 6.67
Paper Industry 6 4.44
TABLE 3
SUMMARY STATISTIC
Mean Standard
deviation
Minimum Maximum
(V it /Ki,t-1) 0.8869 1.2857 0.0061 21.2218
(I it /Ki,t-1) 0.0609 0.2686 -0.8204 3.8364
(I it /Ki,t-1)2 0.0758 0.6967 0.0000 14.7181
(B it /Ki,t-1) 0.0175 0.1977 -1.1657 4.6467
(D it /Ki,t-1) 0.0184 0.0305 0.0000 0.4075
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TABLE 4
ESTIMATION
Model I: (V it /Ki,t-1) =0 + 1(I it /Ki,t-1) + 2(I it /Ki,t-1)2 + 3(B it /Ki,t-1)+ 4(D it /Ki,t-1)+ dt + i + it
Model II: (V it /Ki,t-1) = 0 + (1 + 1DQ i) (I it /Ki,t-1) + (2+ 2DQ i) (I it /Ki,t-1)2 + 3(B it /Ki,t-1)+
4(D it /Ki,t-1)+ dt + i + it
Number of companies = 135; Number of observations = 1.098
I II
Constant -0.11082* (0.0141) -0.11617* (0.0098)
(I it /Ki,t-1) 0.44016* (0.0150) 0.48305* (0.0095)
(I it /Ki,t-1)2 -0.48281* (0.0066) -0.31069* (0.0036)
(B it /Ki,t-1) 1.73516* (0.0542) 1.28198* (0.0285)
(D it /Ki,t-1) 15.56776* (0.2533) 17.06528* (0.1878)
DQi*(I it /Ki,t-1) -0.09344* (0.0156)
DQi*(I it /Ki,t-1)2 -0.37605* (0.0189)
z1 14475 (4) 22787 (6)
z2 21286 (8) 100034 (8)
m2 -1.548 -1.580
Sargan 118.49 (108) 125.80 (132)Notes:i) Heteroskedasticity consistent standard asymptotic error in parentheses.ii) * indicates significance at the 1% level.
iii) z1 is a Wald test of the joint significance of the reported coefficients, asymptotically distributed as2under the null of no relationship; z2 is a Wald test of the joint significance of the time dummies; degreesof freedom in parentheses.iv) m2 is a serial correlation test of second order using residuals in first differences asymptoticallydistributed as N(0,1) under the null of no serial correlation.
v) Sargan is a test of over-identifying restrictions, asymptotically distributed as 2 under the null;degrees of freedom in parentheses.
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Figure II
(Vit/Ki,t-1)
(Iit/Ki,t-1)
Figure III
(Vit/Ki,t-1)
(Iit/Ki,t-1)
Underinvestment (Iit/Ki,t-1) Overinvestment
(Iit/Ki,t-1)q< (Iit/Ki,t-1)
q>