Abstract

http://ssrn.com/abstract=867045
 
 

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The Role of Non-convex Costs in Firms' Investment and Financial Dynamics


Santiago Bazdresch


University of Minnesota - Finance Department

June 1, 2011

Journal of Economic Dynamics and Control, Vol. 37, No. 5, 2013

Abstract:     
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

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Date posted: December 6, 2005 ; Last revised: November 19, 2013

Suggested Citation

Bazdresch, Santiago, The Role of Non-convex Costs in Firms' Investment and Financial Dynamics (June 1, 2011). Journal of Economic Dynamics and Control, Vol. 37, No. 5, 2013. Available at SSRN: http://ssrn.com/abstract=867045 or http://dx.doi.org/10.2139/ssrn.867045

Contact Information

Santiago Bazdresch (Contact Author)
University of Minnesota - Finance Department ( email )
321 19th Avenue South
Room 3-122
Minneapolis, MN 55455
United States
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