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The role of non-convex costs in firms' investment and financial dynamics

  • Bazdresch, Santiago

This paper shows that non-convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics. First, empirically, financial activity is lumpy, more than investment activity. Second, non-convex costs are necessary, in the context of a dynamic investment and financing model, to rationalize this lumpiness. Two versions of the model, with and without non-convex costs, are compared. Only the non-convex costs version replicates the dynamics in the data, generating financial lumpiness higher than investment lumpiness. Other predictions of the model with respect to investment and finance are discussed.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 5 ()
Pages: 929-950

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:5:p:929-950
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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