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http://ssrn.com/abstract=1787350
 
 

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Convergence in Corporate Investments


Vito Gala


The Wharton School

Brandon Julio


London Business School

July 26, 2012


Abstract:     
We provide robust empirical evidence of conditional convergence 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 convergence effect is robust to measurement error in Tobin's Q. The empirical evidence suggests that firm size improves the measurement of firms' unobservable real investment opportunities rather than reflecting differences in firms' financing frictions. Using simulated method of moments, we estimate a simple 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 conditional convergence.

Number of Pages in PDF File: 62

Keywords: Corporate Investment, Convergence

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Date posted: March 19, 2011 ; Last revised: July 27, 2012

Suggested Citation

Gala, Vito and Julio, Brandon, Convergence in Corporate Investments (July 26, 2012). Available at SSRN: http://ssrn.com/abstract=1787350 or http://dx.doi.org/10.2139/ssrn.1787350

Contact Information

Vito D. Gala
The Wharton School ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
Brandon Julio (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 (0)20 7000 8254 (Phone)
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