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How Do Frictions Affect Corporate Investment? A Structural Approach

Published online by Cambridge University Press:  29 December 2016

M. Cecilia Bustamante
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 6 , December 2016 , pp. 1863 - 1895
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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