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How Do Frictions Affect Corporate Investment? A Structural Approach

Maria Cecilia Bustamante

London School of Economics & Political Science (LSE)

June 2013

In this paper we propose a neoclassical investment model as an empirical tool to test investment equations. The model has significant power in explaining investment and external financing issues, and yields testable predictions on the probability of investment which have been neglected in previous studies. Using our approach, we quantify firms' real and financing frictions by industry group. We find that firms' costs of investment and financing are explained by industry characteristics such as the capital intensity. And we identify financially constrained firms by measuring the marginal effect of an increase in cash flows on the probability of investment.

Number of Pages in PDF File: 70

Keywords: Tobin's Q, financing frictions, real frictions, investment, log likelihood

JEL Classification: E22, G31, G32

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Date posted: February 6, 2013 ; Last revised: July 11, 2013

Suggested Citation

Bustamante, Maria Cecilia, How Do Frictions Affect Corporate Investment? A Structural Approach (June 2013). Available at SSRN: http://ssrn.com/abstract=2212419 or http://dx.doi.org/10.2139/ssrn.2212419

Contact Information

Maria Cecilia Bustamante (Contact Author)
London School of Economics & Political Science (LSE) ( email )
Room A370
Houghton Street
London, WC2A 2AE
United Kingdom
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Download Rank: 127,245
References:  45
Citations:  1
Footnotes:  39

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