Investment Reluctance: Irreversibility or Imperfect Capital Markets? Evidence from German Farm Panel Data

Silke Huettel, Oliver Musshoff and Martin Odening
Authors registered in the RePEc Author Service: Silke Hüttel

No 9826, 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Investment behavior at the firm level is characterized by lumpy adjustments and frequent periods of inactivity. Low investment rates are particularly puzzling in transition economies where an urgent need of modernization exists. The literature offers two explanations for. Firstly, neo-institutional finance theory focuses on the impacts of imperfect capital markets on investment decisions showing that the limited availability of financial funds may confine firms' investments. Secondly, real options theory asserts that the interaction of irreversibility, uncertainty and flexibility may also result in investment reluctance. In this paper we suggest a generalized model that combines imperfect capital markets and real options effects. We also offer an econometric implementation that has the structure of a generalized tobit model. This model is applied to German farm panel data. We demonstrate that ignoring real options effects may lead to erroneous results when estimating the impact of imperfect capital markets on investment decisions.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 31
Date: 2007
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea07:9826

DOI: 10.22004/ag.econ.9826

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