the investment theories of kalecki and keynes

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The Investment Theories of Kalecki and Keynes: An Empirical Study of Firm Data, 1970-1982

Author(s): Steven M. Fazzari and Tracy L. MottReviewed work(s):Source: Journal of Post Keynesian Economics, Vol. 9, No. 2 (Winter, 1986-1987), pp. 171-187Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/4538001 .

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STEVEN M. FAZZARI and TRACY L. MOTT

The investmenttheoriesof Kalecki

andKeynes: an empiricalstudyof

firm data, 1970-1982

I. Introduction

In the 1930s, JohnMaynardKeynesand Michal Kaleckiindependentlypresented heoriesof firm behaviorthatemphasizedeffective demand

and financialconditions as primarydeterminantsof investment. This

theoryhas been extendedby JamesDuesenberry 1958), JohnMeyerandEdwinKuh(1957), Hyman Minsky(1975), Josef Steindl(1976),and others. It differs from the neoclassical theoryof optimal capitalaccumulation, n which investment s modeled as the adjustmentof a

capitalaggregateto an

optimallevel, assuming

profit-maximization,perfect competition, and well-behaved neoclassicalproductionfunc-

tions. Rather, n KeynesandKalecki, investmentin fixed capitalpri-

marilydependson a firm's demandexpectationsrelativeto its existing

capacityandits abilityto generate nvestment undingthrough nternal

cash flow and externaldebt financing.This paperanalyzesthe determinantsof investment from the per-

spectiveof KeynesandKaleckiusinga largesampleof U.S. manufac-

turingfirm datafrom 1970to 1982. Thehistoryof estimating hiskindof investmentmodel began with Kalecki's own work (see Kalecki,

1969), but the firstextensiveeconometricstudyalong these lines was

Meyerand Kuh's TheInvestmentDecision (1957). Subsequent cono-

The authorsare Assistant Professorsof Economicsat WashingtonUniversity,Saint

Louis, and the Universityof Colorado, Boulder,respectively.They would like tothankPaul Davidson, ArthurDenzau, EdwardGreenberg,DonaldHarris, and

Hyman Minskyfor helpfulcomments and suggestions.

Journal of Post Keynesian Economics//Winter 1986-87, Vol. IX, No. 2 171



172 JOURNALOF POST KEYNESIAN CONOMICS

metricworkusingwhatMeyerandKuhcalled the "accelerator-residu-

al funds hypothesis" was undertakenby Meyer and Glauber(1964),Kuh(1963), Anderson 1964), Resek(1966), andEvans(1967), amongothers. Coen (1971) analyzed he effect of cash flow on the adjustment

speed of actual to desiredcapital.The theorywas amongthe alterna-

tives tested in several comparativestudies of empirical investment

functions (see Jorgenson, 1971; Bischoff, 1971; Elliott, 1973; and

Clark, 1979), but it has beenovershadowedn recentyears by neoclas-

sical models or models basedon JamesTobin's"q" theoryof invest-ment.

The empiricalresults obtainedwith the accelerator-residual unds

model havebeencriticized on the grounds hat the flow variablesused

torepresentiquidity,such asprofitsor cashflow, succeedonlybecause

theyarehighlycorrelatedwiththeoutputor sales variables hatappearin neoclassicalinvestmentmodels. This studyaddresses his criticism

directly by includingboth sales and flow

liquidityvariablesin the

estimatedequations.Thisapproachmaynothave beensatisfactory or

earlier studies thatusedaggregate ime seriesdata,becausecollinearityand small samplesizes made it difficult to distinguishclearlybetween

the independenteffects of liquidity and acceleratorvariablesin time

seriesregressions. Using a large pooledtime series cross-sectionsam-

ple, however,we obtainedresultsthatclearly ndicatea strong ndepen-dent influence for internalliquidityon investment,even when sales

variablesare included n the equation.This supportsan importantpartof the Kaleckianandpost-Keynesian heorythat has not fared well in

some other studies.2

Anotherdifficulty with the earlierempiricalanalysesof Kaleckian

and post-Keynesianinvestmentmodels and the comparativestudies

cited above is thatthey used datageneratedprimarily n the 1950s and

1960s. The generally tranquilexpansionthat characterized he U.S.

economy from the KoreanWar to the late 1960s resulted in data thatshowed little of thevolatilitywhich is centralto post-Keynesiannvest-

ment theory.In the 1970s, however,the environmentchanged. The

1'"Ouroverall conclusion is thatwhere internalfinance variablesappearas sigificantdeterminantsof desiredcapital, they represent he level of output" (Jorgenson,1971, p. 1133).

2Steindl(1976, pp. 129-130) specifically recognizesthis point. He writes that time

series studies of investmentuse "a particularlyhazardousprocedure .. since utili-zation in practiceis very closely correlatedwith profits" (p. 129). He proposesacross-sectionalstudyof investmentsimilar to what we presentin this paper.



INVESTMENT HEORIESOF KALECKIAND KEYNES 173

amplitudef fluctuationnsales,prices,and inancial onditions reat-

ly increased, ausing ignificant ariabilityn data hathadbeenrela-

tivelysmooth verthepreviouswodecades.Therefore,weexpect he

distinguishingeatures fthepost-Keynesianpproachoemergemore

clearly n theanalysisof therecentdata han n earlierstudies.Theresultspresentedereareconsistentwith hreemajor mpirical

hypothesesdentifiedwiththepost-Keynesianiew:(1)capacity tili-zationor sales variableshave a positiveeffect on investment;2)

variablesmeasuringnternallygenerated inancefor firms have astrongpositiveand ndependentnfluence n firm nvestmentxpendi-ture;and(3) the largerthe interestcommitmentsf firms, ceteris

paribus, he lower their nvestment.Theseresultsholdupin the full

sampleandin various ubsamples.The remainder f this paper s organizedas follows. Section2

summarizeshe theoreticalramework. ection3 presentshespecifi-cationof themodelwe estimate nddiscusses he

empiricalechniqueswe use. Theregression esultsappearn section4.

II. The investmentmodel

Keynes(1936, chapter11) linked he demandor investmento the

marginal fficiencyof capital,or,equivalently,he demand ricefor

capital.Thedemand rice PD) s defined s thepresent alueofprofit

flows a firmexpects o earnfroma marginalnvestmentxpenditureafterdeducting inancing osts. The level of investmentwill settlewhere hedemand riceequalshesupply rice hefirmmustpayfor a

marginalnvestmentPs). Onedeterminantf PDis somemeasure f

output emand.nthe relevantiterature,he variablemostcommonlyused scapacity tilization.3 hereasonorthis s straightforward.hedirecteffectof investments onoutput apacity.Firmswant o main-tainsufficient

apacityo meet

forthcomingemand.

However,apac-ity involvescarrying osts.Excesscapacity elative o demand aisesthesecosts andreducesprofits.Investmentlansmust,therefore,be

closely inkedwithprojected emand elative o currentapacity, ndthisprojection ill bebasedonobservedevelsofcapacity tilization.4

3Steindl 1976, pp. 107-113, 127-130) arguesthat utilization is the primedetermi-

nant of expected profitabilityand thus an essentialdeterminantof investment. Simi-

lar argumentscan be found in Baranand Sweezy (1966, pp. 82-88) and Kalecki

(1971, pp. 1-14).4Usingthis framework,we see that the determinantsof the demandfor replacementinvestment are essentially similar to the determinantsof net investmentdemand.




Keynes(1936, p. 136 andchapter16)alsopositeda fall inthe return

on investment(andthus a fall in PD)as investmentrises, becausethedeclineinthescarcityof capitalreduces hequasi-rent arnedby capital

(see also Davisdon, 1972, pp. 72-73). Othershave linkedthe fall inPDas investment ncreasesdirectlyto firms' perceptionsof limitedoutputmarkets.5Following Steindl(1976), it is assumedthatexcess capacityexists in capitalgoods industries;hence, the costs of producing nvest-

ment goods will not be significantlyaffectedby changinginvestment

levels. Thisimplies

thatdPs/dl

isapproximately

ero.

The demandprice for investmentalso dependson financial condi-

tions.6 A firm's investmentprogramcan be financedwith fundsgener-ated by its own cash flow, or the firm can finance its expenditures

externallyby takingondebt andsetting upcashpaymentcommitments.

Let F, denote the amountof internal cash flow the firm can use to

finance investment. It can invest up to I = F1/Ps without additional

borrowing.AnyinvestmentexceedingImustbe financedexternally,so

thatmarginalexpendituresbeyondI createnew interestobligationsforthe firm.7

There are several reasons why the cost of financing investment

externallywill riseas the level of investment ncreases.Kalecki(1937;1971, pp. 105-109) argued or a "principleof increasingrisk," claim-

ingthat themarginalrisk of fixedcapital nvestmentrises with the level

of investment.This implies that lenders will demandhigher interest

rates as thelevel of a firm's investmentrises (see Mott, 1986). Keynes(1936, p. 144) analyzed a similar phenomenon, which he called

"lender's risk," that "may be due to moral hazard, i.e. voluntarydefaultor othermeansof escape, possiblylawful, from the fulfillment

of obligation,or to thepossibleinsufficiencyof themarginof security,i.e. involuntarydefault due to the disappointmentof expectations."These ideas have been extendedby Minsky(1975), whoemphasizes he

This is consistent with the results of Feldstein and Foot (1971) and Eisner (1978),which show thatreplacementand modernization nvestmentare positively correlated

with investmentfor expansion,althoughthey are less variable.

5SeeDuesenberry 1958, pp. 49-85), Kalecki(1971, pp. 110-123), Mott (1982, pp.46-49), and Steindl (1976, pp. 122-124).

6SeeKalecki (1937; 1971, pp. 105-123), Keynes (1936, especially chapters11 and

12), Davidson (1972, chapter4), and Minsky(1975, chapter5).

7Wedo not consider the possibilityof investmentfinancethroughnew equityhere

since this has been shown to be insignificant.See Goldsmith(1965). Thoughnewequity reducesthe risk of illiquidity, it is more costly to the existing shareholders

thanborrowing.See Kalecki(1937; 1971, pp. 105-109) andWood(1975).




relationshipbetweeninternalcash flow and contractualpaymentcom-

mitments as akey

determinantof thefinancing

terms a firm can ar-

range. Minsky arguesthata well-structuredbusiness loan is basedon

the lender's expectation hat the debt can be serviced from the future

incomegeneratedbya firm'soperations.The "marginof security"for

the loan is the amountby which the firm's expectedincome exceeds its

total contractualpaymentcommitments.Clearly, he lower the level of

internalfinance, the lower the marginof securityfor loans, and the

greater he riskpremium helenderwill require.Theresultis similarto

Kalecki's. As investmentincreases, holding the firm's financial re-sourcesfixed, lenderswill requirea higherinterestrate to compensatefor the increasingriskof default. This lowers the firm's demandpriceof investmentas the level of investment ncreasesbeyondwhat can be

financedinternally.The extent to whichfinancingcosts rise with investmentwill depend

on the bankers'appraisalof a firm's abilityto carrymarginal ncreases

in debt. Thus,PD will fall faster with increasing nvestment,themoreheavilyleveragedthe firm is. The key measureof the firm's abilityto

carrymore debt is the "marginof security,"which is linkedtothe level

of a firm's interestobligationsor cash commitments CC). The higherCC,otherthings equal,thelower themarginof securityandthegreaterthe increasingrisk problems.

Equation(1) gives our specificationof the effective demandpricefor investment faced

byan individualfirm.

(1) PD = PD(I, U, Fi,/Ps, CC)

Increasesin investment(I) or cash commitments CC)reduce the de-

mandprice. Risingcapacityutilization(u)or an increase n the invest-

mentgoods thatcan be purchasedwith internalcash flow (FI/Ps) will

increase the demandprice. EquatingPs and PD gives a structural

relationthat determines a representative irm's investment:

(2) PD(I*, FI/Ps, CC) = Ps,

whereI* represents he investment evel the firm chooses. Solvingfor

I* gives a reducedform for investment,

(3) 1* = I(u, FI/Ps, CC),

that is the basis of the empiricalanalysisthat follows.




PoDPS

PS

I IlI "Dl P (I,u, FI/P, CC)

I I

I= F/P/ i* I

Figure1

The model is presentedgraphicallyin Figure 1. An increase in

capacity utilization shifts the PD curve outward and increases 1*.

As FI rises, the PD curve also shifts out horizontallybecause a

greater internal cash flow means that more investment can be fi-

nanced without resorting to external funding. Holding FI con-

stant, however,we see that variations n CC affect the demandpriceof investment somewhatdifferently.For investment financed intern-

ally CC makes little difference. But highercash commitmentsresult-

ing from the financingof past projects increase the risk of new in-vestment beyond the level that can be internally financed. Thus,

higher CC makes the PD curve fall faster beyond 7, and I* is re-

duced.8

8Notethat, althoughthe analysisis presentedas if the firm exhaustsits entire flow

of internalfinance before it borrows, such a strongassumption s not necessary.Themainpoint is thatthe cost of finance facedby a firm will rise as debtpaymentcom-

mitments ncrease relative to internal cash flow availableto service the debt. If afirm takes on debt to finance a projectthat it could have financedout of internal

funds, we wouldnot expect it to face serious increasingrisk problems, so the PDcurve will not fall significantlyuntil after7 is reached.

This analysisfollows Davidson(1972, chapter4) by integrating inancial condi-tions into the demandprice for investmentgoods. Otherauthorshave modeled fi-nancial constraints hroughthe supplyof funds firms face. Then, the supply priceincludes the capitalizedvalue of financingcosts as well as the purchaseprice of in-vestmentgoods. See Duesenberry(1958, pp. 49-112), Evans(1969, pp. 73-105),

Minsky(1975, pp. 93-116), andMott (1982, pp. 37-59). Bothapproachesresult in

the same empiricalinvestmentequation.Therefore,the distinctionis not crucial forthe purposesof this paper.




III.Empiricalspecification

Threeempirical mplicationsof the modelpresented n the last section

are tested here:

(1) thepositiverelationbetween nvestmentandcapacityutilization

(u),

(2) the positive relation between internal finance (F1)and invest-

ment,

(3) the negativerelationbetween cash paymentcommitments CC)and investment.

Each of thesepropositions ollows directlyfrom the modelinsection2.

Thebasic investmentequationestimatedin thepaperis a linearized

version of equation(3):

(4) INVST = ao + a1 L(SALES) + a2 L(IFIN)+ a3 L(INTEXP) + a4 (GPLANT).

The variable definitions are:

INVST: annualcapital expenditures,SALES: net annualsales,

IFIN: internalfinance, defined as after-taxprofits plus

depreciationallowances minus common and

preferreddividends,INTEXP: net annual interestexpense,

GPLANT: book value of gross plant.

The L functionson SALES, IFIN, and INTEXP represent ags, the

form of which is discussed later. The remainderof this section dis-

cusses the connectionbetweentheempiricalvariablesand the theoreti-

cal model, the econometricestimationtechniques,and the datasampleused.

Themodelpresented n thelast sectionlinkedthedemand orinvest-

ment to capacityutilization. The best way of incorporatinghis effect

into an empiricalinvestmentequationwould be to includea capacityutilizationvariable.However,no acceptablemeasureof capacityutili-

zation is available or the individual irmdatawe use. It is notpossible

todetermineoutputcapacity rom financialdata.Capacityutilization sproxiedby sales data n theempiricalspecification.Variationsn sales




are highly correlated with variationsin utilization, so this approach

shouldyield acceptableresults.The analysis n section2 also identifies an independent ffect of the

level of internal inance(F1)on investment.ThemeasureusedforIFIN

is the flow of funds availableto firms to finance capital expenditure:after-taxprofitsplus depreciationallowances minusdividends.In our

regressions,IFINis laggedto account or thetime between nvestment

decisions and actualexpenditure.

Laggedinterestexpense(INTEXP)is used to estimate the effect ofcontractualcash paymentcommitments CC). In past studies of post-

Keynesian nvestment heory,this effect was usuallymodeledby vari-

ables thatrepresentedhe stock of liquidassetsor the stock of debt(see

Meyer andKuh, 1957, and Meyer and Glauber, 1964, for example).However,following Minsky(1975, chapter5) our model emphasizesthe importanceof theflow of committedcash flows as the relevant

constrainton investment inance. The resultsin the next section show

that this approach esultsin a moresuccessfulempiricalspecification.The GPLANTvariable s includedin equation(6) for econometric

reasons. Because individual firm data are used, investmentwill be

positivelycorrelatedwith all the independent ariablessimplybecause

all the financialdatawill tendto be largerfor largerfirms. By includ-

ing thebook valueof gross planton the right-hand ide of equation(4)as a measure of the overall size of the firm, we can interpretthe

estimated coefficients of the otherindependentvariablesas the effecton investment,holdingthe size of the firmconstant.Since GPLANT

only proxies the size of the firm, it was not lagged in the estimation

equations.In time series studies that use small samplesof quarterlyobserva-

tions, some kind of lag distribution s often imposed to reduce the

multi-collinearitycausedby includinghighly correlated ags in a re-

gression. With the data set used here, this kind of multi-collinearitywill be less seriousbecausethepooledtime seriescross-sectionsampleof over 9,000 observationsimproves the ability of a regression to

distinguishthe effects of correlatedexplanatoryvariables.For these

reasonscontemporaneousndlaggedvaluesof thevariablesare entered

as separate egressors n ourestimatedequations,unconstrained y anydistributed ag assumptions.

The contemporaneousvariablesfor IFIN and INTEXP have been

omitted to avoid a possible simultaneitybias. Because all investmentmust be financed somehow, either internallyor externally,current



INVESTMENT THEORIES OF KALECKI AND KEYNES 179

investment s closely linkedto current inanceby definition.Omitting

the contemporaneousinance variablesfromthe regressionandusingonly lagged values alleviates this problem.9

Lags up to five years' lag were consideredfor each variable. The

most interesting comparison s obtainedbetween the resultswith two

and three ags. Theestimatedcoefficientonthe third agof SALESwas

positive, but quite small. When a third lag was added for IFIN and

INTEXP,their estimated coefficients had the opposite sign from the

coefficientson the firsttwo lags. The magnitudeof the coefficientsforthe first two lags also increased, so the sum of the coefficients, an

estimateof the responseof investmentto a permanentchange in the

independent ariables,wasnotsignificantlyaffectedby includingmore

lags. These resultsindicatemulti-collinearityamongthelongerlags of

IFIN andINTEXP.Also, the estimatedregressionwith two lags had a

lower root mean squarederror than the equationwith threelags. For

these reasons, the resultsreported n the next section include two lagsforeach variable.The conclusionsdrawnarenotaffectedby including

longer lags.Severaleconometricproblemsarise when using pooled cross-sec-

tion time series data to obtain regressionestimates. The time series

variationfor individualfirms often generatesserial correlation n the

errorterms, while the cross-sectionvariationamongdifferentfirms is

likely to causeheteroscedasticity.Theresidualsfrom anordinary east

squares(OLS)regression usingthe specificationof equation(4) showbothof these characteristics.Thereforewe usedan estimatedgeneral-ized least squarestechniqueto obtainmore efficient estimates.

The techniqueis based on the assumption hat the errorterms for

each firm follow a first-orderautoregressiveprocess of the form:

(it = QiEit-1 + Vit

where it is the error for firm i at time t and vithas a zero meananda

variancea thatdependson the firm. This error term allows for both

serialcorrelationandheteroscedasticity.Theequationswereestimated

usinga three-stageprocedure.First we used the residuals(eit) from an

OLS regressionto estimate Qi as

Qi=iite eit-hi/ sEi t-i

t=2 t=2

9We are indebted to Joel Prakken for making this observation.



180 JOURNAL OF POST KEYNESIAN ECONOMICS

whereT s thenumber f observationsnthetimeseries or each irm.

Thenwe obtainedheresidualsvit)froma transformed LSregres-sionin whichall variablesXitwerereplaced yXit - iXit-l. Usingthe vit residuals, we estimate u2by

1 T

S2=

2S t'T- 1 t=2

ThetransformedataweredividedbySi to correctheteroscedasticityin the finalregression.A moredetailedanalysis f thisapproachndfurther eferenceso theeconometriciteraturemaybe found nJudgeet al. (1985,pp. 485-490).

The data were drawnfrom the COMPUSTATnnual ndustrial

tape.0Data or U.S. manufacturingirms(2-digitSIC-Standardn-

dustrialClassification-codesbetween20 and39) were used for theyears1967-1982.The data rom 1967-1969wereusedonlyfor con-

structingaggedvariables,o theregressionsseinvestment ata rom1970-1982.A firm'sobservationoran individualearwas excludedfromthe sample f oneof the following hreeconditions rose:

(1) firmdatawere notupdatedor theyear,(2) thedata eflected majormerger racquisitionor theyear,or

(3) anecessary ata temwasreportedsnotavailableortheyear.The autocorrelationorrectionprocedure equireshat the dataforeach irmconstitute continuouseries ntime,andonly irms hathadat least six time series observationswere included.All datawere

adjustedor inflation ydividingbythe mplicitpricedeflatororU.S.

grossnational roduct.The otal ample ontained,391observations.

IV. Empiricalresults

Theexplanatoryowerof the investmentheorypresentednsection2isgenerally uitegoodforourempiricalpecificationnddata ample.All threepropositionset outat thebeginning f section3 are well

supportedn regressionsrun over the whole sampleand various

subsamples. heregressionshowa positiverelationbetweennvest-ment and the variables epresentingales and internal inance.The

'°Standard and Poor's COMPUSTAT service maintains extensive financial data for

individual U.S. and Canadian firms.




interestexpensevariableshave the expectednegative sign in our esti-

matedequations.The estimatedequationfor the full sample is:

(5)

INVST = .0185 (SALES) + .0025 (SALES-1) + .0033 (SALES_2)

(16.7) (1.6) (2.3)

+ .171 (IFIN_1) + .058 (IFIN-2) - .423 (INTEXP_1)(16.6) (5.4) (012.5)

- .364 (INTEXP_2)+ .144 (GPLANT)

(9.4) (48.8)

- .059 (D71) - .033 (D72) + .003 (D74) - .037 (D75)

(4.7) (2.7) (0.2) (1.4)

- .023 (D76) - .011 (D77) - .025 (D78) + .025 (D79)(3.1) (1.9) (0.9) (2.1)

+ .055 (D80) + .091 (D81) - .004 (D82)

(4.51) (7.2) (0.3)

(t statistics in parentheses)

This equationincludes "fixed effects" thatallow separate nterceptsfor each firm and each year. The annualinterceptsare reportedfor

1971 through1982 as the coefficients on the variablesD71 throughD82. These coefficients are relative to a zero value for 1970. The

interceptsfor each of the 835 firms in sample are not reported in

equation(5). The elasticitiesof investmentwithrespectto a 1 percent

permanent ncrease n the independent ariables,evaluatedat the sam-

ple means, are .32 for SALES, .21 for IFIN, and -. 16 for INTEXP.The positive andsignificantcoefficient on SALESis not surprisingsince outputor acceleratorvariableshave been foundto have explana-

tory powerin investmentequationsbasedon a widevarietyof theoreti-

cal foundations.The results for IFIN are striking,however,since the

estimatedequationshows a strongand independent ffect for internal

finance eventhough t is includedwith sales in theregression.Withthis

specification,it is unlikelythatIFINactsonlyasaproxyforoutputor a

sales accelerator.Thenegativecoefficientson the lags of INTEXPare also consistent




with thetheory presentedearlier.Holdingthe other variablesconstant,

we find higher lagged interestexpensesindicate thata greaterpropor-tion of thefirm's cash flow is committed o debt serviceand, therefore,it is more risky to finance the firm's investmentexpenditures.The

strengthof the effect is particularly nterestingsinceotherstudieshave

had little success in obtainingstatisticallysignificantresults for vari-

ables used to represent imilareffects.1 There are twoexplanations or

the relativestrengthof our interestexpensevariable.First, otherstud-

ies oftenfocusedon stock measuresof debt burden suchas the stockoflong-termdebt, for example). But as Minsky (1975, chapter5) has

pointedout, the key to "validating"the liabilities a firm incurs is for

the firm to generatesufficient cash flow to meet its ongoing commit-

ments.Thus, with otherthingsheldconstant,highlevels of committed

cashflows, thatis, highinterestexpenses,will constrainnvestment,as

the results indicate.12The second explanation or the significanceof

the INTEXP variable is that thesample

used here is drawnfrom a

period (1970-1982) with much greaterfinancial turbulence han the

sample periodsused in earlier studies. More attentionwill be paidto

theadequacyof internalcashflow to meetpaymentcommitmentsn an

environmentwhere the riskof defaultis higherandthe terms available

for investmentfinancingare less stable.

It is also interesting o examinethepatternof the annual ntercepts.

They tend to move pro-cyclically,althoughthey generallylag some-

what behindchangesin GNP.The variationexplainedby theseshiftingintercepts s not trivial. For example, the changefrom 1974 to 1975

explainsa4 percentdropin investment,evaluatedatthesamplemeans.

These resultsimplythatthere s greatercyclicalvariationn investment

than can be accountedfor by changes in the independentvariables

alone. This may be explainedby "animalspirits," or it could be the

result of othercyclical influenceson investmentnot accounted or by

our model. In any case, this issue deserves further nvestigation,par-ticularlywith datathat could be used to analyzethis effect over short

periods, such as calendarquarters.To confirm the results from the pooled time series cross-section

regressions,theequationwas estimatedseparately or eachindustry n

the sample. Industrieswere divided by two-digit SIC codes. Because

"See, for example, Meyer and Kuh (1957, pp. 117-121) and Meyerand Glauber

(1964, pp. 88-94).'2As in otherstudies, we found little significancefor stock measuresof debt in our

investmentequation.




Table 1

Results of separateINVSTregressionsfor 2-digit SIC industries

Significant* Insignificant Insignificant Significantcoefficients coefficients coefficients coefficients

Independent withcorrect withcorrect with ncorrect with ncorrectvariable sign sign sign sign

SALES 13 12 5 0

IFIN 15 1 1 3

INTEXP 20 0 0 0

GPLANT 20 0 0 0

Notes: SIC = Standard ndustrialClassification;INVST = annualcapital expenditures;SALES = net annualsales; IFIN = internalfinance;INTEXP = net annual interestexpense;GPLANT = book value of gross plant.

*A 5 percentsignificancelevel was used for these statistics.

the samplesize for eachof the 20 industries s much smaller than the

aggregatepooled sample,multi-collinearityposedmore of a problem.

Therefore,theresultsfromequation(5) were usedto constructdistrib-

uted lags for the independentvariables. The estimated coefficients

fromequation(5) werenormalized o sum to unityand then used as lag

weights. Usingthis distributedag specification,we estimatedseparate

equationsfor each industry.Table 1 shows thatthe coefficientsalmost

always had the sign predicted by the theory and were statisticallysignificantat the 5 percentlevel for the majorityof the industries.

For the finalempiricaltest, thesamplewas dividedinto 13 separatecross sections for the years 1970through1982. The investmentequa-tion was estimatedusing the lag weights discussed above. These re-

gressionsrequirea somewhatdifferentinterpretationrom the results

presentedso far.Thepooledcross-sectiontime serieswithfirm-specif-

ic interceptsuses data correctedfor differences in the mean valuesbetweenfirms. Therefore,the estimatesare basedon variationwithin

thefirms. Thepurecross-sectionresults,presented n Table2, arenot

correctedfor differencesin firm averages, so the estimatesare based

on variationsbetweenfirms. One wouldexpect the estimatesfrom the

two approaches o differ.

It is evident from Table 2 that sales is much more importantfor

explaining changes in investment across time than for explaining

changesbetweenfirms. The sales coefficients are small andhave un-

predictable signs in the pure cross-section regressions. Interest




Table2

INVST Regressions by year

Estimatedcoefficientof:

Year SALES IFIN INTEXP GPLANT

1970 -.0020t .505 -.01 t .049

1971 .0093 .367 -.248 .043

1972 .0004t .455 -.091t .0411973 .0005t .440 -.128 .094

1974 -.0031t .403 -.330 .080

1975 -.0019t .341 -.250 .076

1976 .0023 .333 -.215 .071

1977 -.0012t .359 -.093 .077

1978 -.0010t .385 -.243 .078

1979 -.0045 .443 -.162t .087

1980 -.0066 .481 -.101t .086

1981 -.0093 .471 -.099t .0441982 -.0065 .432 -.100 .078

Note: INVST = annualcapital expenditures;SALES = net annualsales; IFIN = internal

finance;INTEXP = net annual nterestexpense;GPLANT = book value of gross plant.

tCoefficients not significantlydifferentfrom zero at the 5 percentlevel.

expenses also have a strongereffect in the "within" regressionsal-

thoughthe coefficients all have the expectednegativesign in the crosssections. The internal finance variable, however, has a very strongeffect in the cross sections. The elasticities evaluatedat samplemeans

for each year range from 0.32 to 0.50. This suggests that internal

finance is quite importantfor explainingwhy different firms invest

different amounts at any point in time.

V. Conclusion

Theresultsof this studyare favorable o theinvestment heorypresent-ed in section 2. All three hypotheses derived from the investment

model are consistent with the empiricalanalysis.Our results reaffirm

the commonconclusion of other investmentstudies thatsales, utiliza-

tion, or acceleratorvariables are signficiantin explaining nvestment

throughtime. The strong, independenteffect of internalfinance is

more interesting,however,since it is a predictionof the investmenttheories of Kalecki, Steindl,Minsky,and othersthathasnot often been




distinguishedromoutputeffects in otherempiricalnvestment e-

search.Thenegative ffectof interestxpenses alsoevidentntheestimat-

ed equations.Othershaveattemptedo isolateaneffectof this kindwith ittlesuccess.Thestrong esults btainedredue npart o theuseof interest xpenseas a flowmeasuringirms'ongoing inancial osi-tion ratherhan heuseof stock iquidity ariables.Also,thesamplesdrawn romaperiodn which inancialurbulencelayeda muchmore

importantole ntheeconomyhan nthetimeperiod overedbymostearlierstudies.

Theseresultshave mportantmplicationsormacroeconomicnal-

ysisin theKeynesianradition,n which nvestments recognizedsafundamental eterminantf the level of aggregateactivity.Firms'

financial onditionshave a signficiantmpacton thelevelof invest-ment.Therefore,heresultspresentederereinforceheargumentsf

Kalecki,Keynes,Minsky,Davidson,ndothers hat he

availabilityf

financeplays a basic role in the determinationf macroeconomic

performance.Several xtensions resuggested ythispaper orfuture esearch.

First, since this paperfocuseson the Kaleckian r post-Keynesiantheoriesof investment lone, the resultsshouldbe testeddirectly

against hosebasedon alternativeheoreticaloundations,speciallythe neoclassicalheoryof optimal apitalaccumulationnd financial

theoriesof investmentn the tradition f Tobin's"q" theory.13Also,the analysisof separate ross sectionsover time could be furtherrefined o studyhowinvestmentelations hangewithvarious yclicalcharacteristicsn theeconomy.Finally, t will be interestingo inte-

grate the empirical nvestment pecificationdevelopedhere intobroadermacroeconomicmodelsto consider he implications f thisworkfor macroeconomictability ndpolicy design.

Overall,this paperreestablishes n empiricalnvestmentmodelbasedon thetheoreticalradition f KaleckiandKeynesas a seriousalternativeo the conventionalpproacheshathavecome to receivewideracceptancen the recent iterature.The resultsarequitestrongand heysuggest he need or a renewed ffort oempirically omparetheimplications f the Kaleckian ndpost-Keynesianlternativesootherapproaches.

'3See Fazzari andAthey (1986) for an analysisof the importanceof financingvari-

ables in neoclassical and accelerator nvestmentspecifications.




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the investment theories of kalecki and keynes

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