Does Costly Reversibility Matter for U.S. Public Firms?

Hang Bai, Erica X. N. Li, Chen Xue and Lu Zhang
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Hang Bai: University of Connecticut - Department of Finance
Erica X. N. Li: Cheung Kong Graduate School of Business
Chen Xue: University of Cincinnati
Lu Zhang: Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Yes, most likely. The firm-level evidence on costly reversibility is even stronger than the prior evidence at the plant level. The firm-level investment rate distribution is highly skewed to the right, with a small fraction of negative investments, 5.79%, a tiny fraction of inactive investments, 1.46%, and a large fraction of positive investments, 92.75%. When estimated via simulated method of moments, the standard investment model explains the average value premium, while simultaneously matching the key properties of the investment rate distribution, including the cross-sectional volatility, skewness, and the fraction of negative investments. The combined effect of costly reversibility and operating leverage is the key driving force behind the model’s quantitative performance.

JEL-codes: E22 E44 G12 G14 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-bec, nep-mac and nep-ore
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2019-25

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