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Investment and Performance of Firms: Correlation or Causality?

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  • Heshmati, Almas

    ()
    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Lööf, Hans

    ()
    (http://www.infra.kth.se/cesis/cesis/index2.htm)

Abstract

The purpose of this paper is to provide empirical analysis of the two-way causal relationship between some important investment and performance indicators at the firm level, in particular controlling for differences in these relationships between two cohorts of small and middle-sized firms and large firms respectively. Investigated performance variables include sales, value added, profit, cash flow, capital structure and employment. A multivariate vector autoregressive approach is applied to a panel of Swedish firms observed between 1992 and 2000. In particular, an attempt is made to investigate whether causal relationships between R&D and firm performance are of a transitory nature and whether the causal relationships are similar for small and medium-sized and large firms. Results show evidence of some two way causal relationships, which are mainly transitory in character. Significant heterogeneity is observed in the firms’ investment and performance behavior by their size.

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File URL: http://www.kth.se/dokument/itm/cesis/CESISWP72.pdf
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Bibliographic Info

Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 72.

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Length: 33 pages
Date of creation: 03 Aug 2006
Date of revision:
Handle: RePEc:hhs:cesisp:0072

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Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/
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Keywords: R&D investment; productivity growth; financial constraints; panel data;

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  1. Cohen, Wesley M & Klepper, Steven, 1996. "A Reprise of Size and R&D," Economic Journal, Royal Economic Society, vol. 106(437), pages 925-51, July.
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