What Explains the Lagged Investment Effect?

37 Pages Posted: 18 Apr 2011

See all articles by Janice C. Eberly

Janice C. Eberly

Northwestern University - Kellogg School of Management

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Nicolas Vincent

HEC Montreal - Institute of Applied Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2011

Abstract

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano, Eichenbaum and Evans (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

Keywords: Cash flow, Tobin's Q

JEL Classification: E2

Suggested Citation

Eberly, Janice C. and Tavares Rebelo, Sergio and Vincent, Nicolas, What Explains the Lagged Investment Effect? (April 2011). CEPR Discussion Paper No. DP8309. Available at SSRN: https://ssrn.com/abstract=1810274

Janice C. Eberly (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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Evanston, IL 60208
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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Nicolas Vincent

HEC Montreal - Institute of Applied Economics ( email )

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Montréal, Quebec H3T 2A7
Canada

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