Empirically, ADF tests fail to reject the null hypothesis that sales are I(1). We build a model of inventory behavior that incorporates permanent sales shocks. Analytically, the model with I(1) sales implies that the variance ratio (of log production to log sales) is one in the long run,...

Investment models based on Tobin's q are theoretically appealing, but they have been an empirical disappointment when applied to aggregate time-series data. This paper explores two potential explanations for the poor empirical performance of q investment models, problems arising from aggregation...

An extension of Hamilton's Markov switching techniques (Hamilton, J. B., 1989, A new approach to the economic analysis of nonstationary time series and the business cycle, Econometrica, 57, 357-84) is used to describe and analyse stock market returns. Using new tests, very strong evidence is...

A new theoretical literature has suggested that the Modigliani-Miller theorem may not hold under imperfect information and that liquidity may affect a firm's investment spending. This paper provides three original tests for such capital market imperfections based on predicted differences in...