Investment Behavior, Observable Expectations, and Internal Funds

We use earnings forecasts from securities analysts to construct more accurate measures of the fundamentals that affect the expected returns to investment. Using a variety of econometric techniques, including semi-parametric estimators, we find that investment responds significantly--in both economic and statistical terms--to our new measures of fundamentals. With our controls for expected future profits, we find that internal funds are uncorrelated with investment spending, even for selected subsamples of firms--those paying no dividends and those without bond ratings--that have been found to be quot;liquidity constrainedquot; in previous studies