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On the interaction of financial frictions and fixed capital adjustment costs: Evidence from a panel of German firms

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Author Info
Bayer, Christian

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Abstract

This paper analyzes the interaction of financial frictions and non-convex adjustment costs. Non-convex adjustment costs imply that firm-level investment is lumpy. Firms invest infrequently but each investment is large. This allows financial variables to influence investment along two margins. They can alter the size of the stock of capital a company wishes to hold in the long run or they can influence the frequency at which investment projects are undertaken. The empirical analysis of this paper reveals that finance has nearly no long-run influence on the stock of capital in a sample of German companies. By contrast, the influence of finance on investment decisions is substantial. Consequently, finance primarily affects investment frequencies and financial factors and fundamental capital productivity strongly interact in the determination of investment.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 11 (November)
Pages: 3538-3559
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Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3538-3559

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Keywords: Investment Imperfect capital markets Non-convex adjustment costs Non-linear panel cointegration;

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References listed on IDEAS
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kalckreuth, Ulf von, 2008. "Panel estimation of state dependent adjustment when the target is unobserved," Discussion Paper Series 1: Economic Studies 2008,09, Deutsche Bundesbank, Research Centre. [Downloadable!]
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