Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-15T08:24:39.421Z Has data issue: false hasContentIssue false
  • English
  • Français

How Do Frictions Affect Corporate Investment? A Structural Approach

Published online by Cambridge University Press:  29 December 2016

M. Cecilia Bustamante
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides a structural approach to testing investment equations based on the log-likelihood function of a nonlinear investment rule. The analysis integrates the predictions of the q-theory for the commonly studied active region of investment and provides new inferences on how real and financing frictions affect the probability that a firm invests. The empirical findings are consistent with the macro-finance literature suggesting that q-theory models with nonconvex investment frictions better explain the data. I also find that both real and financing costs of investment are related to the capital intensity of the industry in which firms operate.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 6 , December 2016 , pp. 1863 - 1895
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel, A., and Eberly, J.. “A Unified Model of Investment under Uncertainty.” American Economic Review, 73 (1994), 228–233.Google Scholar
Abel, A., and Eberly, J.. “Investment and q with Fixed Costs: An Empirical Analysis.” Working Paper, Northwestern University (2002).Google Scholar
Abel, A.; Eberly, J.; Dixit, A.; and Pindyck, R.. “Options, the Value of Capital, and Investment.” Quarterly Journal of Economics, 111 (1996), 753–777.CrossRefGoogle Scholar
Altınkılıç, O., and Hansen, R.. “Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs.” Review of Financial Studies, 13 (2000), 191–218.CrossRefGoogle Scholar
Arellano, M. Panel Data Econometrics. New York, NY: Oxford University Press (2003).CrossRefGoogle Scholar
Baily, M.; Hulten, C.; and Campbell, D.. “Productivity Dynamics in Manufacturing Establishments.” Brookings Papers on Economic Activity: Microeconomics, 4 (1992), 187–249.CrossRefGoogle Scholar
Barnett, S., and Sakellaris, P.. “Nonlinear Response of Firm Investment to Q: Testing a Model of Convex and Nonconvex Adjustment Costs.” Journal of Monetary Economics, 42 (1998), 261–288.CrossRefGoogle Scholar
Belo, F.; Xue, H.; and Zhang, L.. “A Supply Approach to Valuation.” Review of Financial Studies, 42 (2013), 261–288.Google Scholar
Blanchard, O.; Rhee, C.; and Summers, L.. “The Stock Market, Profit, and Investment.” Quarterly Journal of Economics, 108 (1993), 115–136.CrossRefGoogle Scholar
Bloom, N.“The Impact of Uncertainty Shocks.” Econometrica, 77 (2009), 623–685.Google Scholar
Bolton, P.; Chen, H.; and Wang, N.. “A Unified Theory of Tobin’s q, Corporate Investment, Financing and Risk Management.” Journal of Finance, 66 (2011), 1545–1578.CrossRefGoogle Scholar
Bond, S., and Meghir, C.. “Dynamic Investment Models and the Firms’ Financial Policy.” Review of Economic Studies, 61 (1994), 197–222.CrossRefGoogle Scholar
Bond, S., and Van Reenen, J.. “Microeconometric Models of Investment and Employment.” In Handbook of Econometrics, Heckman, J. J. and Leamer, E. E., eds. Amsterdam, Netherlands: Elsevier (2007).Google Scholar
Caballero, R.“Aggregate Investment.” In Handbook of Macroeconomics, Taylor, J. and Woodford, M., eds. Amsterdam, Netherlands: North-Holland (1997).Google Scholar
Caballero, R., and Leahy, J.. “Fixed Costs: The Demise of Marginal q.” National Bureau of Economic Research Working Paper No. 5508 (1996).CrossRefGoogle Scholar
Campello, M., and Giambona, E.. “Real Assets and Capital Structure.” Journal of Financial and Quantitative Analysis, 48 (2013), 1333–1370.CrossRefGoogle Scholar
Campello, M., and Hackbarth, D.. “The Firm-Level Credit Multiplier.” Journal of Financial Intermediation, 21 (2012), 446–472.CrossRefGoogle Scholar
Cooper, I.“Asset Pricing Implications of Nonconvex Adjustment Costs and Irreversibility of Investment.” Journal of Finance, 61 (2005), 139–170.CrossRefGoogle Scholar
Cooper, R., and Haltiwanger, J.. “On the Nature of Capital Adjustment Costs.” Review of Economic Studies, 73 (2006), 611–633.CrossRefGoogle Scholar
Dubinin, T., and Vardeman, S.. “Likelihood-Based Inference in Some Continuous Exponential Families with Unknown Threshold Parameters.” Journal of the American Statistical Association, 98 (2003), 741–749.CrossRefGoogle Scholar
Eberly, J.; Rebelo, S.; and Vincent, N.. “What Explains the Lagged Investment Effect?” Journal of Monetary Economics, 59 (2012), 370–380.CrossRefGoogle Scholar
Erickson, T., and Whited, T.. “Measurement Error and the Relationship between Investment and q .” Journal of Political Economy, 108 (2000), 1027–1057.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Gala, V., and Gomes, J.. “Beyond Q: Estimating Investment without Asset Prices.” Working Paper, University of Pennsylvania (2015).Google Scholar
Gilchrist, S., and Himmelberg, C.. “Evidence on the Role of Cash Flow for Investment.” Journal of Monetary Economics, 36 (1995), 541–572.CrossRefGoogle Scholar
Gomes, J.“Financing Investment.” American Economic Review, 91 (2001), 1263–1285.CrossRefGoogle Scholar
Gomes, J.; Yaron, A.; and Zhang, L.. “Asset Pricing Implications of Firms’ Financing Constraints.” Review of Financial Studies, 19 (2006), 1321–1356.CrossRefGoogle Scholar
Gourio, F., and Kashyap, A.. “Investment Spikes: New Facts and a General Equilibrium Exploration.” Journal of Monetary Economics, 54 (2007), 1–22.CrossRefGoogle Scholar
Hansen, L., and Singleton, K.. “Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models.” Econometrica, 50 (1982), 1269–1286.CrossRefGoogle Scholar
Hayashi, F.“Tobin’s Marginal q and Average q: A Neoclassical Interpretation.” Econometrica, 50 (1982), 213–224.CrossRefGoogle Scholar
Hayashi, F. Econometrics. Princeton, NJ: Princeton University Press (2000).Google Scholar
Hennessy, C.“Tobin’s Q, Debt Overhang, and Investment.” Journal of Finance, 59 (2004), 1717–1741.CrossRefGoogle Scholar
Hennessy, C.; Levy, A.; and Whited, T.. “Testing Q-Theory with Financing Frictions.” Journal of Financial Economics, 83 (2006), 691–717.CrossRefGoogle Scholar
Hennessy, C., and Whited, T.. “How Costly Is External Financing? Evidence from a Structural Estimation.” Journal of Finance, 62 (2007), 1705–1745.CrossRefGoogle Scholar
Kaplan, S., and Zingales, L.. “Do Financing Constraints Explain Why Investment Is Correlated with Cash Flow?” Quarterly Journal of Economics, 112 (1997), 169–216.CrossRefGoogle Scholar
Lemmon, M.; Roberts, M.; and Zender, J.. “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.CrossRefGoogle Scholar
Liu, L.; Whited, T.; and Zhang, L.. “Investment-Based Expected Stock Returns.” Journal of Political Economy, 117 (2009), 1105–1139.CrossRefGoogle Scholar
Newey, W.“Efficient Semiparametric Estimation via Moment Restrictions.” Econometrica, 72 (2004), 1877–1897.CrossRefGoogle Scholar
Olley, S., and Pakes, A.. “The Dynamics of Productivity in the Telecommunications Equipment Industry.” Econometrica, 64 (1996), 1263–1297.CrossRefGoogle Scholar
Schennach, S., and Hu, Y.. “Nonparametric Identification and Semiparametric Estimation of Classical Measurement Error Models without Side Information.” Journal of the American Statistical Association, 108 (2013), 177–186.CrossRefGoogle Scholar
Zhang, L.“The Value Premium.” Journal of Finance, 60 (2005), 67–103.CrossRefGoogle Scholar