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INVESTMENT: A CRITICAL REVIEW OF ~V~ETHODOLOGICAL ISSUES AND INTERNATIONAL EVIDENCE

In recent years there has been a resurgence of interest in the determinants of firms’ investment decisions. The empirical shortcomings of existing models, developed mainly under the assumption of perfect capital markets, and theoretical advances in the field of information economics have stimulated an explosion of studies focusing on the effects of financial constraints on investment. The purpose of this paper is to provide a critical assessment of the methodological issu6s involved in testing the implications of capital market imperfections for investment, and to offer a critical review of the econometric evidence on this topic. In particular, the paper will concentrate on the empirical contributions that have used firm-level panel data. It is the increased availability of panel data that has resulted in the burst of empirical work in recent years. With firm-level panel data, a researcher can examine how the incidence and severity of information and incentive problems vary across firms and over time and investigate the differential effects on investment. Finally, I will adopt an international perspective and comment on the econometric evidence on firm investment behavior available for both developed and less developed countries. I begin with a brief review of the theoretical arguments that explain why information and incentive problems introduce a wedge between the costs of internal and external finance; the paper then outlines the implications for investment decisions. The following section explores