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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
Christian Bayer (Universität Dortmund)

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Abstract

This paper analyzes the interaction of financial frictions and non- convex adjustment costs. With non-convex adjustment costs firms infrequently carry out discrete investment projects. Therefore, financial variables may influence investment in two ways. Theoretically, they can alter the frequency at which investment projects are undertaken, or they can influence the size of the stock of capital a company wishes to hold in the long run. Empirically, finance has nearly no long-run influence on the stock of capital in the sample of German companies which this paper analyzes. By contrast, the influence of finance on investment decisions is substantial. Consequently, finance primarily affects investment frequencies and accordingly, financial factors and fundamental capital productivity strongly interact in the determination of investment.

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Paper provided by EconWPA in its series Macroeconomics with number 0410006.

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Length: 36 pages
Date of creation: 21 Oct 2004
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Handle: RePEc:wpa:wuwpma:0410006

Note: Type of Document - pdf; pages: 36
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Web page: http://129.3.20.41

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Related research
Keywords: Investment imperfect capital markets debt constraints adjustment costs nonlinear panel cointegration

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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