Estimating irreversible investment with financial constraints: an application of switching regression models

Hirokatsu Asano

Applied Economics, 2010, vol. 42, issue 2, 211-222

Abstract: This analysis investigates irreversible investment with financial constraints. When investment is irreversible, zero investment can be optimal and investment becomes lumpy. Because external funds are not a perfect substitute for internal funds, financially constrained firms invest differently than unconstrained firms. To incorporate both irreversibility and financial constraints into estimations, the analysis develops a switching regression model that depends on the real options theory of capital investment. The analysis investigates three US industries: the oil refining, communications equipment manufacturing and semiconductor manufacturing industries. The analysis shows that internal funds affect investment if a firm is financially constrained.

Date: 2010
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DOI: 10.1080/00036840701579218

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