This dissertation is composed of three essays concerning the role of financial constraints in a firm's investment policy. In the first essay, I consider the role of the market for credit default swaps (CDS) in relaxing a firm’s financial constraints and spurring investment in intangible assets. I find that CDS trading is associated with an increase in research and development (R\&D) spending and patenting activity. This is consistent with a channel in which CDS trading protects creditors when borrowers' assets have limited collateral value. In my second essay, I present evidence that the presence of financial constraints for a firm’s competitors tends to spur investment spending. I use a tax law change to identify exogenous changes in Financial Constraints (FC) to establish causality. This evidence suggests that product market considerations interact with financial constraints in the determination of both firm-level and industry-level innovation. My third essay is a methodological investigation pertaining to all studies that use panel data techniques, including studies of financial constraints and investment decisions. I investigate whether the Strict Exogeneity (SE) assumption, a necessary condition for consistent parameter estimates using common estimation techniques, holds in canonical finance panel data regressions. I find that this key assumption is violated quite frequently and can lead to substantive biases in parameter estimates. I suggest a general approach for identification in these situations that exploits industry-time variation in the variable of interest.
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