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Investment and Performance of Firms: Correlation or Causality?

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  • Heshmati, Almas

    () (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Lööf, Hans

    () (http://www.infra.kth.se/cesis/cesis/index2.htm)

Abstract

The purpose of this paper is to provide empirical analysis of the two-way causal relationship between some important investment and performance indicators at the firm level, in particular controlling for differences in these relationships between two cohorts of small and middle-sized firms and large firms respectively. Investigated performance variables include sales, value added, profit, cash flow, capital structure and employment. A multivariate vector autoregressive approach is applied to a panel of Swedish firms observed between 1992 and 2000. In particular, an attempt is made to investigate whether causal relationships between R&D and firm performance are of a transitory nature and whether the causal relationships are similar for small and medium-sized and large firms. Results show evidence of some two way causal relationships, which are mainly transitory in character. Significant heterogeneity is observed in the firms’ investment and performance behavior by their size.

Suggested Citation

  • Heshmati, Almas & Lööf, Hans, 2006. "Investment and Performance of Firms: Correlation or Causality?," Working Paper Series in Economics and Institutions of Innovation 72, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  • Handle: RePEc:hhs:cesisp:0072
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    File URL: https://static.sys.kth.se/itm/wp/cesis/cesiswp72.pdf
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    References listed on IDEAS

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    1. Cohen, Wesley M & Klepper, Steven, 1996. "A Reprise of Size and R&D," Economic Journal, Royal Economic Society, vol. 106(437), pages 925-951, July.
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    Cited by:

    1. Jozsef Toth & Liesbeth Dries & Stefano Pascucci, 2012. "Open Innovation Characters of the Hungarian wine Industry," MIC 2012: Managing Transformation with Creativity; Proceedings of the 13th International Conference, Budapest, 22–24 November 2012 [Selected Papers], University of Primorska, Faculty of Management Koper.

    More about this item

    Keywords

    R&D investment; productivity growth; financial constraints; panel data;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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