Theory and empirics of investment: a selective review of the literature

This chapter contains a review of the literature which forms the background for the empirical study presented in Chapter 4. I concentrate on the two major areas of recent research on firms’ investment decisions identified in the introduction: Recent developments in formulating and estimating models of firms’ “real” investment decisions (Section 2.1), and financial constraints that may affect firms’ investment (Section 2.2). As discussed in the introduction, the first area has recently experienced major theoretical advances which have not yet entered empirical practice, while in the second area, there has been much empirical research in the last decade, with many of the theoretical advances in the first literature having been largely ignored so far.