The aim of the research project is to investigate the way in which financial and ownership structure of the manufacturing sector in the United States affects the pursuit of long term investment goals, in particular, the development of new products and processes. Three different empirical studies are conducted. First, a model of simultaneous choice of investment and financial policy is outlined, which can be used to investigate the effect of liquidity constraints on research and development investment (or ordinary investment) at the firm level. Second, additional work will be undertaken that looks into the sources of gain from merger, leveraged buyout or other "going private" transactions using a discrete choice model of exit which also incorporates the value of the transaction as measured by its price. Third, the same model is used to construct predictions of takeover probability which can serve as a screen to identify potentially undervalued firms. Examination of the returns to the equities of such firms (for those which are not subsequently acquired) provides a partial test of the hypothesis of market myopia or undervaluation of long-term investment. An important part of the project involves updating a dataset constructed during a previous NSF grant which consists of balance sheets and income statements as well as exit information for approximately 2700 manufacturing firms from 1959 through 1987. This dataset has been widely used by researchers in the economics profession.
