Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric

Dmitry Livdan and Alexander Nezlobin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm’s capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm’s investment history. If capital goods have constant efficiency over a finite useful life, then simple proxies are readily available for both the replacement cost of assets in place and capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We then show that these components exhibit significantly different economic determinants and behavior.

Keywords: Tobin's Q; investment; capital stock; replacement stock; depreciation (search for similar items in EconPapers)
JEL-codes: D21 D24 G31 M41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2021-12-01
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Journal of Financial Economics, 1, December, 2021, 142(3), pp. 1444 - 1469. ISSN: 0304-405X

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http://eprints.lse.ac.uk/108639/ Open access version. (application/pdf)

Related works:
Journal Article: Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:108639

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