Essay I investigates the behavior of research and development ( R&D ) investment: how sensitive is R&D investment to available cash flow for financially constrained and unconstrained firms? One important distinction between R&D investment and investment in physical capital is that the result of R&D investment can not serve as collateral, as it may be impossible to put a lien on R&D capital. Given that characteristic, one would expect R&D investment to be sensitive to cash flow, especially for financially constrained firms. Using Hall's Manufacturing Sector Master File, we show that R&D investment is more sensitive to internal finance for financially constrained firms than for financially unconstrained firms in the U.S manufacturing sector.
Essay II investigates the investment decision of a firm allowing for endogenous technological change. The basic idea is that new capital embodies new technology. Therefore, investment in new capital can change the level of productivity and that of technology. Based on this observation, a simple Q model of capital investment, which describes the investment behavior of a firm under the assumption of endogenous technological change, is developed. The reduced form investment equation is easily estimable and does not involve any data complications as in the previous vintage models. The model is estimated using U.S. manufacturing sector data over the period 1947-1987 and the data provides support for the model.
Essay III explores the Fisher relationship for stock returns in a set of emerging markets: Korea, Indonesia, Philippines, Thailand, Mexico, Argentina, and Chile for the period December 1987 to November 1995. Using a generalized method of moments technique we document a statistically reliable positive relation between stock returns and expected inflation for Philippines, Mexico, Argentina, and Chile and a negative relation for Indonesia and Thailand. For Korea the relationship is statistically insignificant. The implications of those results are important in the sense that they help us to evaluate whether stocks can provide a hedge against inflation in those emerging markets, where the role of the stock market can be crucial in encouraging saving, investment, and growth.
