Investment and capital market imperfections: A switching regression approach using US firm panel data

In this paper we develop a switching regression model of investment, in which the probability of a firm facing a high premium on external finance is endogenously determined. This approach allows one to address the potential problem of static and dynamic misclassification encountered where firms are sorted using a criteria chosen a priori. We use U. S. firm level data to analyze the effects of variables that capture each firm's credit worthiness, asymmetric information, and agency problems on the probability of being in the high-or low-premium regime. The role of macroeconomic conditions and monetary policy is also discussed.