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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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  • Bayer, Christian

Abstract

This paper analyzes the interaction of financial frictions and non-convex adjustment costs. Non-convex adjustment costs imply that firm-level investment is lumpy. Firms invest infrequently but each investment is large. This allows financial variables to influence investment along two margins. They can alter the size of the stock of capital a company wishes to hold in the long run or they can influence the frequency at which investment projects are undertaken. The empirical analysis of this paper reveals that finance has nearly no long-run influence on the stock of capital in a sample of German companies. By contrast, the influence of finance on investment decisions is substantial. Consequently, finance primarily affects investment frequencies and financial factors and fundamental capital productivity strongly interact in the determination of investment.

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  • Bayer, Christian, 2008. "On the interaction of financial frictions and fixed capital adjustment costs: Evidence from a panel of German firms," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3538-3559, November.
    • Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3538-3559
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    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. Ulf Kalckreuth, 2011. "Panel estimation of state-dependent adjustment when the target is unobserved," Empirical Economics, Springer, vol. 40(1), pages 205-235, February.
    3. René Belderbos & Kyoji Fukao & Keiko Ito & Wilko Letterie, 2013. "Global Fixed Capital Investment by Multinational Firms," Economica, London School of Economics and Political Science, vol. 80(318), pages 274-299, April.
    4. Blatter, Marc & Muehlemann, Samuel & Schenker, Samuel, 2012. "The costs of hiring skilled workers," European Economic Review, Elsevier, vol. 56(1), pages 20-35.
    5. 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.
    6. Adam Andrzej Zając & Michał Wielechowski & Krzysztof Smoleń & Dariusz Karaś, 2024. "Macroeconomic Determinants of Investment Decisions for Medium and Large Enterprises in Poland’s Manufacturing Sector," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 4, pages 74-92.
    7. Caulkins, Jonathan P. & Feichtinger, Gustav & Grass, Dieter & Hartl, Richard F. & Kort, Peter M. & Seidl, Andrea, 2015. "Capital stock management during a recession that freezes credit markets," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 1-14.

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    More about this item

    Keywords

    Investment Imperfect capital markets Non-convex adjustment costs Non-linear panel cointegration;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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