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

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  • Bazdresch, Santiago

Abstract

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.

Suggested Citation

  • Bazdresch, Santiago, 2013. "The role of non-convex costs in firms' investment and financial dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 929-950.
  • Handle: RePEc:eee:dyncon:v:37:y:2013:i:5:p:929-950
    DOI: 10.1016/j.jedc.2013.01.002
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    Cited by:

    1. repec:eee:jbfina:v:81:y:2017:i:c:p:172-180 is not listed on IDEAS
    2. Eisfeldt, Andrea L. & Muir, Tyler, 2016. "Aggregate external financing and savings waves," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 116-133.

    More about this item

    Keywords

    Financial frictions; External financing costs; Investment; Dynamic trade-off model; Financial lumpiness;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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