Adjustment costs, financial frictions and aggregate investment

Fabrizio Casalin and Enzo Dia

Journal of Economics and Business, 2014, vol. 75, issue C, 60-79

Abstract: We develop a simple theoretical model of investment under the assumption that financial frictions generate adjustment costs different from those of industrial origin that are normally discussed in the literature. We identify several restrictions that are used to test and estimate the model using aggregate data for the United States. We find strong evidence that adjustment costs on external finance are significant. We then investigate whether the availability of external finance affects investment of non-financial corporations. We find that a strong relationship holds between financial flows and investment. Shocks to investment have a persistent impact on external finance, whereas the impact on investment of external finance shocks is less persistent.

Keywords: Financial constraints; Adjustment costs; Investment; Tobin's q (search for similar items in EconPapers)
JEL-codes: E22 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:75:y:2014:i:c:p:60-79

DOI: 10.1016/j.jeconbus.2014.06.001

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