The role of non-convex costs in firms' investment and financial dynamics

Santiago Bazdresch ()

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 5, 929-950

Abstract: This paper shows that non-convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics. First, empirically, financial activity is lumpy, more than investment activity. Second, non-convex costs are necessary, in the context of a dynamic investment and financing model, to rationalize this lumpiness. Two versions of the model, with and without non-convex costs, are compared. Only the non-convex costs version replicates the dynamics in the data, generating financial lumpiness higher than investment lumpiness. Other predictions of the model with respect to investment and finance are discussed.

Keywords: Financial frictions; External financing costs; Investment; Dynamic trade-off model; Financial lumpiness (search for similar items in EconPapers)
JEL-codes: E22 E42 E44 G31 G32 G33 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:5:p:929-950

DOI: 10.1016/j.jedc.2013.01.002

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