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What Explains the Lagged Investment Effect?

  • Eberly, Janice
  • Rebelo, Sérgio
  • Vincent, Nicolas

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano, Eichenbaum and Evans (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8309.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8309
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