TY - JOUR AU - Gilchrist, Simon AU - Himmelberg, Charles TI - Investment, Fundamentals and Finance JF - National Bureau of Economic Research Working Paper Series VL - No. 6652 PY - 1998 Y2 - July 1998 DO - 10.3386/w6652 UR - http://www.nber.org/papers/w6652 L1 - http://www.nber.org/papers/w6652.pdf N1 - Author contact info: Simon Gilchrist Department of Economics New York University 19 West 4th Street. New York, NY, 10003 Tel: 212 992 9770 Fax: NA E-Mail: sg40@nyu.edu Charles Himmelberg Charles P. Himmelberg Pretium Partners 810 7th Ave, 19fl New York, NY 10019 Tel: 646-285-8710 E-Mail: Charlie.Himmelberg@gmail.com M1 - published as Simon Gilchrist, Charles Himmelberg. "Investment: Fundamentals and Finance," in Ben S. Bernanke and Julio J. Rotemberg, editors, "NBER Macroeconomics Annual 1998, volume 13" MIT Press (1999) AB - Financial variables such as cash flow and cash stocks are robust and quantitatively important explanatory variables for investment at the firm-level. A large body of recent empirical work attributes these findings to capital market imperfections. This interpretation is controversial, however, because even in the absence of capital market imperfections, such financial variables may appear as an explanatory variable for investment if they contain information about the expected marginal value of capital. In this paper, we show how structural models of investment with costly external finance can be used to identify and quantify the fundamental' versus the financial' determinants of investment. Our empirical results show that investment responds significantly to both fundamental and financial factors. Point estimates from our structural model imply that, for the average firm in our sample, financial factors raise the overall response of investment to an expansionary shock by 25%, relative to a baseline case where financial frictions are zero. Consistent with theory, small firms and firms without bond ratings show the strongest response to financial factors, while bond-rated firms show little if any response once we control for investment fundamentals. ER -