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Convergence in Corporate Investments

Author

Listed:
  • Brandon Julio

    (London Business School)

  • Vito Gala

    (London Business School)

Abstract

We provide robust empirical evidence of conditional convergence in corporate investments among US firms. Small firms have significantly higher investment rates than large firms even after controlling for standard empirical proxies of firm investment opportunities and financial status, such as Tobin's Q and cash flow measures. The inclusion of a firm's initial size in a traditional Tobin's Q investment regression is at least as economically and statistically important as the inclusion of cash flow measures in explaining corporate investment dynamics. This finding is robust to measurement errors, sample selection, nonlinear specifications of the investment regression, different estimation horizons, and different proxies of investment opportunities and financial status. We also document convergence in corporate investments in other countries around the world. Accounting for the size dependence in standard empirical investment specifications substantially improves the explanatory power of corporate investments dynamics. Moreover, the empirical evidence suggests that firm size improves the measurement of firms' true investment opportunity set rather than reflecting differences in firms' financial constraints.

Suggested Citation

  • Brandon Julio & Vito Gala, 2011. "Convergence in Corporate Investments," 2011 Meeting Papers 911, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:911
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    References listed on IDEAS

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    Cited by:

    1. Xiao, Min & You, Jiaxing & Zhao, Jingwen, 2017. "How Does Being Public Affect Firm Investment? Further Evidence from China," The International Journal of Accounting, Elsevier, vol. 52(1), pages 1-21.
    2. Hengjie Ai & Rui Li, 2012. "Moral hazard, investment, and firm dynamics," FRB Atlanta CQER Working Paper 2012-01, Federal Reserve Bank of Atlanta.

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