Financing Constraints and Corporate Investment

Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the "cost of capital" or "q"). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a "financing hierarchy," in which internal finance has important cost advantages over external finance. We build on recent research concerning imperfections in markets for equity and debt. This work suggests that some firms do not have sufficient access to external capital markets to enable them to respond to changes in the cost of capital, asset prices, or tax-based investment incentives. To the extent that firms are constrained in their ability to raise funds externally, investment spending may be sensitive to the availability of internal finance. That is, investment may display "excess sensitivity" to movements in cash flow. In this paper, we work within the q theory of investment, and examine the importance of a financing hierarchy created by capital-market imperfections. Using panel data on individual manufacturing firms, we compare the investment behavior of rapidly growing firms that exhaust all of their internal finance with that of mature firms paying dividends. We find that q values remain very high for significant periods of time for firms paying no dividends, relative to those for mature firms. We also find that investment is more sensitive to cash flow for the group of firms that our model implies is most likely to face external finance constraints. These results are consistent with the augmented model we propose, which takes into account different financing regimes for different groups of firms. Some extensions and implications for public policy are discussed at the end.

Market Structure and Cyclical Fluctuations in U.S. Manufacturing

The relevance of imperfect competition for models of aggregate economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. Measuring properly the size of industry markups of price over marginal cost is important both for assessing the role of market structure and for determining the extent to which excess capacity is a significant feature accompanying imperfect competition in American industry. Using a panel data set on four-digit Census manufacturing industries, this paper expands recent work by Robert Hall on the importance of market structure for understanding cyclical fluctuations. We outline a methodology for estimating industry markups of price over cost and the influence of market structure on cyclical movements in total factor productivity. While we find evidence to support the proposition that price exceeds marginal cost in U.S. manufacturing, our results offer only limited support for the notion that markups are importantly related to differences in industry concentration, though the effect of unionization is important. Concentration effects are important only in industries producing durable goods or differentiated consumer goods. In addition, much of the estimated markup of price over marginal cost is accounted for by fixed costs related to overhead labor, advertising, and central office expenses; we do not find compelling evidence of substantial evidence of excess capacity in most industries.

Business Cycles and Oligopoly Supergames: Some Empirical Evidence on Prices and Margins

There has been a significant interest on a theoretical level in the application of supergames to oligopoly behavior. Implications for pricing behavior in trigger-strategy models in response to aggregate demand are of particular importance for public policy considerations. We contrast the predictions for the movements of industry prices over the business cycle of two such models -- put forth by Edward Green and Robert Porter and by Julio Rotemberg and Garth Saloner -- and test the predictions using a panel data set of U.S. manufacturing industries. Our principal findings are four. First, the levels of price-cost margins of concentrated, homogeneous-goods industries, while higher than those of unconcentrated counterparts, appear to be closer to those predicted by a single-period Cournot-Nash equilibrium than monopoly. Second, there is little evidence to support the idea that price-cost margins of these industries have different cyclical patterns from other industries apart from effects by level of industry concentration. Maximum price declines for concentrated industries give little support for the occurrence of price wars during either recessions or booms. Finally, consistent with the predictions of the Rotemberg-Saloner model, the industries with high price-cost margins have more countercyclical price movements than those exhibited by other industries. That gradual price adjustment is quantitatively important for those industries, suggests, however, that other factors may lie behind the apparent rigidity of prices.

Financing Constraints and Corporate Investment

macroeconomics, Financing Constraints, Corporate Investment

Financing Constraints and Corporate Investment: Response to Kaplan and Zingales

Kaplan and Zingales (1995, hereafter KZ) criticize Fazzari, Hubbard and Petersen (1988, hereafter FHP) and much ensuing research that uses cross-sectional differences in firm behavior to test for financing constraints on investment. This reply identifies flaws in the KZ analysis. The questions KZ raise have been considered extensively and rigorously in the literature (most of which is not addressed in KZ), with results broadly similar to those of FHP. We also challenge both of KZ's main results. First, their finding that most of the FHP firms are not financially constrained relies on an inappropriate operational definition of what it means to be constrained. Their definition ignores the incentives for firms that operate in imperfect capital markets to accumulate stocks of cash or maintain unused debt capacity to offset partially shocks to the flow of internal finance. Second, the KZ regression results (lower sensitivity of investment to cash flow for firms classified as constrained than for those classified as unconstrained) are uninformative. Their classification approach relies on possibly self- serving managerial statements that may present a distorted picture of firm's availability of finance. It also employs misleading criteria to make unrealistically fine distinctions in the degree of financing constraints, and emphasizes financial distress rather than financing constraints. Finally, econometric problems affect the interpretation of the KZ regressions. We conclude that the KZ findings do not contradict the interpretation of the empirical results in FHP and subsequent research.

At the Intersection of Chieftainship and Constitutional Government: Some Comparisons from Micronesia

Indigenous Micronesian political forms closely parallel those of eastern Melanesian and Polynesian societies. Chieftainship integrates aspects of land tenure, kin groupings, status hierarchy, and ideologies of the supernatural. Because so many aspects of social and political economy meet in these institutions, chiefly politics have traditionally been responsive to popular pressures; there is in fact, if not necessarily in myth, very little that is autocratic about them. The primary debate in the Federated States of Micronesia has not been about the importance of chieftainship, but whether the people are better served by including chiefs within their constitutional government or keeping them outside it, where it is believed they can more effectively exercise the checks and balances the people wish to maintain.Les formes politiques indigènes de Micronésie sont très proches de celles des sociétés de Polynésie et de Mélanésie de l’est. La chefferie intègre certains aspects de la propriété foncière, des groupements de parenté, des statuts hiérarchiques et des idéologies de la surnature. Dans la mesure où ces institutions sont à la croisée de tant d’aspects de l’économie sociale et politique, les politiques menées par les chefs tendent, traditionnellement, à tenir compte des pressions populaires ; quoi qu’en dise le mythe, dans les faits, elles ne sont que très marginalement autocratiques. Le débat central parmi les États fédérés de Micronésie ne concerne donc pas l’importance de la chefferie, mais la question de savoir si le peuple a intérêt à ce que le gouvernement constitutionnel inclut les chefs, ou s’il vaut mieux les en exclure, partant du principe qu’il sont mieux placés pour garantir le contrôle et le contre-point que le peuple souhaite maintenir

Ethnicity and interests at the 1990 Federated States of Micronesia Constitutional Convension

Political relations within the Federated States of Micronesia (FSM) are strained not only by the FSM's ambiguous (and tenuous) relationship with the United States but bu the heterogeneity of the peoples who make up its population. In July 1990 the FSM undertook a Constitutional Convention (ConCon) intended to confront and perhaps resolve some of the stresses Micronesians saw accumulating. At the 1975 Micronesian Constitutional Convention, which drafted the FSM's original constitution, the dynamics had in large measure turned on the question of political stus: the Convention was charged with drafting a constitution for an entity whose future political status remained entirely indeterminate. Relations among the various regions within these polity would in turn be contingent upon the outcome of negotiations that were still far from complete. The problems the 1990 ConCon faced were, on the other hand, rooted in matters more specifically concerned with internal relations, both between the several states and their national government and among the states themselves. These internal affairs were of course contingent upon still evolving relations with the United States

CsrA impacts survival of Yersinia enterocolitica by affecting a myriad of physiological activities.

BackgroundA previous study identified a Yersinia enterocolitica transposon mutant, GY448, that was unable to export the flagellar type three secretion system (T3SS)-dependent phospholipase, YplA. This strain was also deficient for motility and unable to form colonies on Lauria-Bertani agar medium. Preliminary analysis suggested it carried a mutation in csrA. CsrA in Escherichia coli is an RNA-binding protein that is involved in specific post-transcriptional regulation of a myriad of physiological activities. This study investigated how CsrA affects expression of the flagellar regulatory cascade that controls YplA export and motility. It also explored the effect of csrA mutation on Y. enterocolitica in response to conditions that cue physiological changes important for growth in environments found both in nature and the laboratory.ResultsThe precise location of the transposon insertion in GMY448 was mapped within csrA. Genetic complementation restored disruptions in motility and the YplA export phenotype (Yex), which confirmed this mutation disrupted CsrA function. Mutation of csrA affected expression of yplA and flagellar genes involved in flagellar T3SS dependent export and motility by altering expression of the master regulators flhDC. Mutation of csrA also resulted in increased sensitivity of Y. enterocolitica to various osmolytes, temperatures and antibiotics.ConclusionsThe results of this study reveal unique aspects of how CsrA functions in Y. enterocolitica to control its physiology. This provides perspective on how the Csr system is susceptible to adaptation to particular environments and bacterial lifestyles