When investment is irreversible, theory suggests that firms will be quot;reluctant to invest.quot; This reluctance creates a wedge between the discount rate guiding investment decisions and the standard Jorgensonian user cost (adjusted for risk). We use the intertemporal tradeoff between the...

This paper uses regime-switching econometrics to study stock market crashes and to explore the ability of two very different economic explanations to account for historical crashes. The first explanation is based on historical accounts of quot;manias and panics.quot; Its key features are that...

This paper tests between fads and bubbles using a new empirical strategy (based on switching-regression econometrics) for distinguishing between competing asset-pricing models. By extending the Blanchard and Watson (1982) model, we show how stochastic bubbles can lead to regime-switching in...

By studying the gap between the discount rates used by executives and shareholders, we assess the extent to which governance problems distort firm behavior. The estimation strategy recovers discount rates used by executives from the pattern of their actual investment spending. Our empirical work...

Is real investment fully determined by fundamentals or is it sometimes affected by stock market misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether overinvestment...

We derive parametric tests for the role of the interest rate in specifications based on the firm's optimization problem. These Euler equation and decision rule tests mirror earlier evidence, finding little role for the interest rate. We present a simple and intuitively appealing explanation,...