A panel analysis of liquidity constraints and firm investment

The issue of financial constraints on company investment is revisited using the U.S. panel data of 561 firms from 1971-1992. A number of economically meaningful factors are discovered to partition firms into relatively homogeneous groups. A mixed fixed- and random-coefficients framework is then used to capture unobserved heterogeneity within groups. The prediction criterion is used to select the final specification and evaluate the importance of financial constraints on firm's investment decisions.