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Capital Intensity and the Firm's Cost of Capital

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  • Harris, Frederick H deB
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    Abstract

    Recent reports of negative capital intensity coefficients in struct ure-performance equations support allegations of gross measurement error in accounting-based measures of economic profitability. This paper explores whether specification errors, rather than measurement errors alone, may explain this anomalous empirical result. Within a simultaneous equations model of capital intensity, cost of capital, and price-cost margins, the author employs Hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm-specific cost of capital from price-cost margin equations. The roles of cost of capital and capital intensity are derived from formal structure-performance theory. Copyright 1988 by MIT Press.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics & Statistics.

    Volume (Year): 70 (1988)
    Issue (Month): 4 (November)
    Pages: 587-94

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    Handle: RePEc:tpr:restat:v:70:y:1988:i:4:p:587-94

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    Web page: http://mitpress.mit.edu/journals/

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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