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

Dmitry Livdan and Alexander Nezlobin

Journal of Financial Economics, 2021, vol. 142, issue 3, 1444-1469

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, 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 show these components exhibit significantly different economic determinants and behavior.

Keywords: Tobin’s Q; Investment; Capital stock; Replacement cost; Depreciation (search for similar items in EconPapers)
JEL-codes: D21 D22 D24 D25 G31 M41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Working Paper: 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:eee:jfinec:v:142:y:2021:i:3:p:1444-1469

DOI: 10.1016/j.jfineco.2021.05.021

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