VALUE MAXIMIZATION AND THE INFORMATION-CONTENT OF CORPORATE-INVESTMENT WITH RESPECT TO EARNINGS

In this paper we study the dynamic nature of the relationship between earnings and investment. If managers act as wealth maximizers, we woul d expect that new investments should lead to increased earnings. Howev er, past research has found that investment is not causally prior to e arnings. Using recent developments in time-series econometrics, we sho w that the dynamic nature of the relationship between earnings and inv estment exhibits bi-directional causality, Our results are consistent with managers investing in positive NPV projects, but managers appear to face financing constraints because investment decisions are driven by the availability of internally generated earnings.