How Do Frictions Affect Corporate Investment? A Structural Approach
Maria Cecilia Bustamante
London School of Economics & Political Science (LSE)
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
Date posted: February 6, 2013 ; Last revised: July 11, 2013
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