The investment decision: a re-examination of competing theories using panel data

A re-examination of the competing theories of investment using panel data for US manufacturing firms finds that the time-series regressions rank the neoclassical model as the best and the cross-section and fixed effects regressions give the number 1 spot to the cash flow model. If the results from cross-section regressions are viewed as representing the long-run equilibrium, the single-most important determinant of capital expenditures appears to be cash flows. These results are consistent with earlier findings in the literature, support the need for an eclectic approach to the study of capital expenditure decisions at the firm level, and vindicate the choice of the firm as the basic unit of analysis in the study.