Capital Intensity and the Firm's Cost of Capital
AbstractRecent 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 InfoArticle provided by MIT Press in its journal Review of Economics & Statistics.
Volume (Year): 70 (1988)
Issue (Month): 4 (November)
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Web page: http://mitpress.mit.edu/journals/
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