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Euler investment equation, leverage and cash flow misspecification: An empirical analysis on a panel of French manufacturing firms

Author

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  • Jean-Bernard Chatelain

    (PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres, LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

  • Jean-Christophe Teurlai

    (Mutuelle du Mans - Mutuelle du Mans)

Abstract

Using a large panel of French manufacturing firms, this paper first reports tests for cash flow misspecification in structural Euler equation including or not leverage. If those tests are not rejected for both Euler equations, in a second step, a direct test on the omission of leverage in the Euler equation is reported. Three groups of "financially healthy" firms (high dividend payout, rising debt, high cash flow with respect to investment) exhibit (in some cases, small) risk premia which significantly increases with leverage. The neo-classical Euler equation is rejected on all groups of firms that have been investigated.

Suggested Citation

  • Jean-Bernard Chatelain & Jean-Christophe Teurlai, 2006. "Euler investment equation, leverage and cash flow misspecification: An empirical analysis on a panel of French manufacturing firms," Post-Print halshs-00754149, HAL.
    • Handle: RePEc:hal:journl:halshs-00754149
    DOI: 10.1016/j.jmacro.2004.07.008
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    Cited by:

    1. Sevcan Yesiltas, 2009. "Financing Constraints and Investment: The Case of Turkish Manufacturing Firms," 2009 Meeting Papers 874, Society for Economic Dynamics.
    2. Jean‐Bernard Chatelain, 2010. "The Profit–Investment–Unemployment Nexus And Capacity Utilization In A Stock‐Flow Consistent Model," Metroeconomica, Wiley Blackwell, vol. 61(3), pages 454-472, July.
    3. Jean-Bernard Chatelain & Andre Tiomo, 2003. "Monetary Policy and Corporate Investment in France," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00112523, HAL.
    4. Eleni Angelopoulou & Sarantis Kalyvitis, 2012. "Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation," Southern Economic Journal, John Wiley & Sons, vol. 78(3), pages 1057-1078, January.
    5. Saltari, E. & Travaglini, G., 2012. "A note on optimal capital stock and financing constraints," Economic Modelling, Elsevier, vol. 29(4), pages 1177-1180.

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