Firm Size and Corporate Investment

54 Pages Posted: 19 Mar 2011 Last revised: 14 Sep 2016

See all articles by Vito D. Gala

Vito D. Gala

Morningstar Investment Management LLC

Brandon Julio

Lundquist College of Business, University of Oregon

Date Written: September 12, 2016

Abstract

We provide robust empirical evidence of size effects in corporate investments. Small firms have significantly higher investment rates than large firms, even after controlling for standard empirical proxies of firm real investment opportunities and financial status, including Tobin’s Q and cash flow. Firm size is at least as important as Tobin’s Q and cash flow, both economically and statistically, in explaining variation in corporate investments. Unlike the cash flow effect, however, the size effect is robust to measurement error in Tobin’s Q. Contrary to common wisdom, the empirical evidence suggests that firm size improves the measurement of firms’ real investment opportunities rather than reflecting differences in firms’ financing frictions. Using simulated method of moments, we estimate a neoclassical model of investment and show that technological decreasing returns to scale, along with measurement error in Tobin’s Q, replicates successfully the empirical evidence on size effects.

Keywords: Corporate Investment, Size Effects

Suggested Citation

Gala, Vito D. and Julio, Brandon, Firm Size and Corporate Investment (September 12, 2016). Available at SSRN: https://ssrn.com/abstract=1787350 or http://dx.doi.org/10.2139/ssrn.1787350

Vito D. Gala

Morningstar Investment Management LLC

22 W Washington Street
Chicago, IL 60602
United States

Brandon Julio (Contact Author)

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,114
Abstract Views
4,673
Rank
35,981
PlumX Metrics