IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections

  • Christian Bayer

    (University of Dortmund)

In this paper a model of aggregate investment is derived which incorporates fixed investment costs and capital market imperfections on the micro-level. Aggregate investment reacts nonlinearily with respect to aggregate shocks to productivity and liquidity of firms. Employing non-parametric kernel estimation methods to analyze a sample of annual account data of UK companies, these nonlinearities also show up empirically. Furthermore a difference in strength between the long- and the short-run effect of liquidity on investment is found, which is inconsistent with models that explain the empirical correlation of investment and liquidity solely as the result of some long-run relationship like liquidity-dependent costs-of-capital. Moreover, as a side-result when imposing a linear structure, we find, as reported in previous studies, that financially constrained firms appear to be less influenced by liquidity than unconstrained ones. However, this finding disappears when the investment function is estimated without any restrictions on the functional form and thus has to be attributed to a misspecification error, which is avoided by the estimation strategy of this paper.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econwpa.repec.org/eps/em/papers/0405/0405001.pdf
Download Restriction: no

Paper provided by EconWPA in its series Econometrics with number 0405001.

as
in new window

Length: 44 pages
Date of creation: 19 May 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0405001
Note: Type of Document - pdf; pages: 44
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Hall, B. & Mairesse, J. & Mulkay, B., 1998. "Firm-Level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years," Economics Papers 143, Economics Group, Nuffield College, University of Oxford.
  2. Ahmad, Ibrahim A. & Li, Qi, 1997. "Testing independence by nonparametric kernel method," Statistics & Probability Letters, Elsevier, vol. 34(2), pages 201-210, June.
  3. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
  4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  5. G. Urga & P. A. Geroski & S. Lazarova & C. F. Walters, 2003. "Are differences in firm size transitory or permanent?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 47-59.
  6. Russell Cooper & Jonathan Willis, 2009. "The Cost of Labor Adjustment: Inferences from the Gap," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 632-647, October.
  7. Russell W. Cooper & Jonathan L. Willis, 2001. "The Economics of Labor Adjustment: Mind the Gap," NBER Working Papers 8527, National Bureau of Economic Research, Inc.
  8. Bayraktar, Nihal & Sakellaris, Plutarchos & Vermeulen, Philip, 2005. "Real versus financial frictions to capital investment," Working Paper Series 0566, European Central Bank.
  9. Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series 114, Board of Governors of the Federal Reserve System (U.S.).
  10. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 197-222.
  11. Abel, Andrew B & Eberly, Janice C, 1994. "A Unified Model of Investment under Uncertainty," American Economic Review, American Economic Association, vol. 84(5), pages 1369-84, December.
  12. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  13. Christian Bayer, 2004. "A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper," Macroeconomics 0408010, EconWPA.
  14. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
  15. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  16. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  17. Pagan,Adrian & Ullah,Aman, 1999. "Nonparametric Econometrics," Cambridge Books, Cambridge University Press, number 9780521586115, November.
  18. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, 04.
  19. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  20. Caballero, R.J., 1994. "Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach," Working papers 94-32, Massachusetts Institute of Technology (MIT), Department of Economics.
  21. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  22. Holt, Richard W. P., 2003. "Investment and dividends under irreversibility and financial constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 27(3), pages 467-502, January.
  23. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Price Rigidities, Asymmetries, and Output Fluctuations," NBER Working Papers 4091, National Bureau of Economic Research, Inc.
  24. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
  25. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  26. Caggese, Andrea, 2007. "Testing financing constraints on firm investment using variable capital," Journal of Financial Economics, Elsevier, vol. 86(3), pages 683-723, December.
  27. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  28. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
  29. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  30. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  31. Peter C.B. Phillips, 1993. "Fully Modified Least Squares and Vector Autoregression," Cowles Foundation Discussion Papers 1047, Cowles Foundation for Research in Economics, Yale University.
  32. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
  33. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  34. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
  35. Austan Goolsbee & David B. Gross, 1997. "Estimating Adjustment Costs with Data on Heterogeneous Capital Goods," NBER Working Papers 6342, National Bureau of Economic Research, Inc.
  36. repec:adr:anecst:y:1999:i:55-56 is not listed on IDEAS
  37. repec:rus:hseeco:124089 is not listed on IDEAS
  38. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
  39. Whited, Toni M., 2006. "External finance constraints and the intertemporal pattern of intermittent investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 467-502, September.
  40. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
  41. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
  42. Rilstone, Paul, 1991. "Nonparametric Hypothesis Testing with Parametric Rates of Convergence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 209-27, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpem:0405001. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.