Investment irreversibility and cyclical adversity: Implications for the financial performance of European manufacturing companies

Kaido Kepp and Kadri Männasoo

Managerial and Decision Economics, 2021, vol. 42, issue 7, 1665-1678

Abstract: This investigation shows how the irreversibility constraints of fixed tangible investments conditioned on the debt flows and financial standing of a company affect its financial performance in cyclical adversity. The System General Method of Moments (GMM) estimator evaluates the endogenous link between the investment‐financing flows of companies and the risk‐adjusted returns on assets and invested capital. The detrimental effects on financial returns stem from the ill‐fated timing of irreversible or partially irreversible fixed tangible investment and arise for companies when there is a deep cyclical gap in real value added, where this adverse effect is particularly strong under concomitant high uncertainty in producer prices.

Date: 2021
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https://doi.org/10.1002/mde.3334

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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:42:y:2021:i:7:p:1665-1678

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