In this paper a model based on the Euler equation of optimal capital accumulation in the presence of convex adjustment costs is developed and estimated. The theoretical model explicitly allows for differential financial status across firms. The empirical analysis uses Romanian manufacturing firm panel data to estimate dynamic investment models with the generalized method of moments (GMM-IV) technique and tests the derived hypotheses. The results indicate that the model based on the perfect market assumptions is rejected. The version of the model that allows for differential financial status of firms by using a theoretically derived sample selection rule is not rejected by the data. Controlling for soft budget constraints, common for transition economies, further improves the performance of the model.
Number of Pages in PDF File: 26
Date posted: December 3, 2004
Rizov, Marian, Firm Investment in Transition: Evidence from Romanian Manufacturing. Economics of Transition, Vol. 12, No. 4, pp. 721-746, December 2004. Available at SSRN: http://ssrn.com/abstract=622425
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