Abstract
Following Bond and Meghir(1990), the Euler approach is applied to model investment decisions for a sample of large Italian firms. The main feature of the panel is that it includes private as well as state-owned firms, both quoted and unquoted. In the paper some evidence of the existence of sensitivity to cash flow and leverage is provided. Furthermore, it is seen that the effect of financial factors on investment varies across firms according to their institutional characteristics. In particular, state-owned firms appear to be more sensitive to cash flow than privately-owned companies, and quoted firms show more sensitivity to internal finance than unquoted firms. Finally, we also find strong empirical support to the idea that only the smallest firms in the sample pay a premium for debt as a function of leverage. Less conclusive evidence suggests that both unquoted firms and low dividend companies also face distress costs.
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