How Do Frictions Affect Corporate Investment? A Structural Approach

M. Cecilia Bustamante

Journal of Financial and Quantitative Analysis, 2016, vol. 51, issue 6, 1863-1895

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.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:51:y:2016:i:06:p:1863-1895_00

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