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Investment and Performance of Firms: Correlation or Causality?

Author

Listed:
  • 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

    as
    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.
    2. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-784, August.
    3. Michele Cincera, 2003. "Financing constraints, fixed capital and R&D investment decisions of Belgian firms," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 6, pages 129-152, Edward Elgar Publishing.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Áron TÖRÖK & József TÓTH, 2013. "Open characters of innovation management in the Hungarian wine industry," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 59(9), pages 430-438.
    2. Stoneman, Paul, 2011. "Soft Innovation: Economics, Product Aesthetics, and the Creative Industries," OUP Catalogue, Oxford University Press, number 9780199697021, Decembrie.
    3. József TÓTH, 2013. "Trust €“ Networking €“ Innovation," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 7(1), pages 510-519, November.
    4. 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.
    5. Toth, Jozsef, 2015. "Value creation and capturing: the case of the Hungarian agri-food SMEs," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204229, Agricultural Economics Society.
    6. Igor Stubelj, 2014. "Investment and Profits: Causality Analysis in Selected EU Countries," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 12(4 (Winter), pages 395-413.

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    More about this item

    Keywords

    R&D investment; productivity growth; financial constraints; panel data;
    All these keywords.

    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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