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What Explains the Lagged Investment Effect?

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  • Eberly, Janice
  • Rebelo, Sérgio
  • Vincent, Nicolas

Abstract

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano, Eichenbaum and Evans (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8309.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8309

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Keywords: Cash flow; Tobin's Q;

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  1. Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 197-205, February.
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  8. Thomas Philippon, 2006. "The Bond Market's q," NBER Working Papers 12462, National Bureau of Economic Research, Inc.
  9. Jorgenson, D.W., 1992. "Tax Reform and the Cost of Capital : An International Comparison," Harvard Institute of Economic Research Working Papers 1621, Harvard - Institute of Economic Research.
  10. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
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