The Role of Non-convex Costs in Firms' Investment and Financial Dynamics
University of Minnesota - Finance Department
June 1, 2011
Journal of Economic Dynamics and Control, Vol. 37, No. 5, 2013
This paper shows that non-convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics. First, empirically, financial activity is lumpy, more than investment activity. Second, non-convex costs are necessary, in the context of a dynamic investment and financing model, to rationalize this lumpiness. Two versions of the model, with and without non-convex costs, are compared. Only the non-convex costs version replicates the dynamics in the data, generating financial lumpiness higher than investment lumpiness. Other predictions of the model with respect to investment and finance are discussed.
Number of Pages in PDF File: 38
Keywords: Financial frictions; External financing costs; Investment; Dynamic trade-off model; Financial lumpiness
JEL Classification: E22; E42; E44; G31; G32; G33
Date posted: December 6, 2005 ; Last revised: November 19, 2013
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