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Investment and Time to Plan: A Comparison of Structures vs. Equipment in a Panel of Italian Firms

  • Charles Himmelberg

    (Federal Reserve Bank of New York)

  • Alessandra del Boca

    (Università di Brescia)

  • Marzio Galeotti

    (Università di Milano)

  • Paola Rota

    (Università di Brescia)

“Time to build” models of investment expenditures play an important role in many traditional and modern theories of the business cycle, especially for explaining the dynamic propagation of shocks. We estimate the structural parameters of a time-to-build model using firm-level investment data on equipment and structures. For equipment expenditures, we find no evidence of time-to-build effects beyond one period. For structures, by contrast, there is clear evidence of time to build in the range of 2-3 years. The contrast between equipment and structures is intuitively reasonable and consistent with previous results. The estimates for structures also indicate that initial-period expenditures are low, and increase as projects near completion. These results provide empirical support for including “time to plan” effects for investment in structures. More generally, these results suggest a potential source of specification error for Q models of investment and production-based asset pricing models that ignore the time required to plan, build and install new capital.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2005.54.

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Date of creation: Apr 2005
Handle: RePEc:fem:femwpa:2005.54
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  1. Patrick K. Asea & Paul J. Zak, 1997. "Time-to-Build and Cycles," NBER Technical Working Papers 0211, National Bureau of Economic Research, Inc.
  2. Palm, Franz C & Peeters, H M M & Pfann, G A, 1993. "Adjustment Costs and Time-to-Build in Factor Demand in the U.S. Manufacturing Industry," Empirical Economics, Springer, vol. 18(4), pages 639-671.
  3. Thomas Mayer, 1959. "Plant and Equiptment Lead Times," The Journal of Business, University of Chicago Press, vol. 33, pages 127.
  4. Rouwenhorst, K. Geert, 1991. "Time to build and aggregate fluctuations : A reconsideration," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 241-254, April.
  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
  6. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
  7. Petya Koeva Brooks, 2001. "Time-To-Build and Convex Adjustment Costs," IMF Working Papers 01/9, International Monetary Fund.
  8. Altug, Sumru, 1993. "Time-to-Build, Delivery Lags, and the Equilibrium Pricing of Capital Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 301-19, August.
  9. Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc.
  10. Lawrence J. Christiano & Richard M. Todd, 1996. "Time to plan and aggregate fluctuations," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-27.
  11. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  12. Elena Bontempi & Alessandra Del Boca & Alessandra Franzosi & Marzio Galeotti & Paola Rota, 2004. "Capital Heterogenity: Does it Matter? Fundamental Q and Investment on a Panel of Italian Firms," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 674-690, Winter.
  13. João F. Gomes & Amir Yaron & Lu Zhang, 2006. "Asset Pricing Implications of Firms' Financing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1321-1356.
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  15. Ueda, Kazuo & Yoshikawa, Hiroshi, 1986. "Financial Volatility and the q Theory of Investment," Economica, London School of Economics and Political Science, vol. 53(29), pages 11-27, February.
  16. repec:taf:applec:v:28:y:1996:i:2:p:203-08 is not listed on IDEAS
  17. John B. Taylor, 1982. "The Swedish Investment Funds System as a Stabilization Rule," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 57-106.
  18. Peeters, Marga, 1998. " Persistence, Asymmetries and Interrelation in Factor Demand," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 747-764, December.
  19. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-273, March.
  20. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  21. Altug, Sumru, 1989. "Time-to-Build and Aggregate Fluctuations: Some New Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 889-920, November.
  22. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-26, August.
  23. Petya Koeva Brooks, 2000. "The Facts About Time; To-Build," IMF Working Papers 00/138, International Monetary Fund.
  24. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  25. Bar-Ilan, Avner & Strange, William C, 1996. "Investment Lags," American Economic Review, American Economic Association, vol. 86(3), pages 610-622, June.
  26. Wildasin, David E, 1984. "The q Theory of Investment with Many Capital Goods," American Economic Review, American Economic Association, vol. 74(1), pages 203-210, March.
  27. Peeters, Marga, 1996. "Investment gestation lags: The difference between time-to-build and delivery lags," MPRA Paper 28549, University Library of Munich, Germany.
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