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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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  • Christian Bayer

    (Universität Dortmund)

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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Bibliographic Info

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

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

Note: Type of Document - pdf; pages: 36
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Web page: http://128.118.178.162

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

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Cited by:
  1. Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.
  2. Guariglia, Alessandra & Tsoukalas, John & Tsoukas, Serafeim, 2012. "Investment, irreversibility, and financing constraints: Evidence from a panel of transition economies," Economics Letters, Elsevier, vol. 117(3), pages 582-584.
  3. Blatter, Marc & Muehlemann, Samuel & Schenker, Samuel, 2012. "The costs of hiring skilled workers," European Economic Review, Elsevier, vol. 56(1), pages 20-35.
  4. Ulf Kalckreuth, 2011. "Panel estimation of state-dependent adjustment when the target is unobserved," Empirical Economics, Springer, vol. 40(1), pages 205-235, February.

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