How and When Do Firms Adjust Their Investments Toward Targets?
52 Pages Posted: 4 May 2016 Last revised: 11 Apr 2017
Date Written: April 10, 2017
Crisis-induced welfare losses, due to a decrease in investments and GDP, could have been mitigated by targeted policy measures, if policy makers had known firms' investment demand. Using unique survey data on firms' investment targets, we analyze i) adjustment costs of firm investments and ii) the impact of the recent crisis on adjustment costs. We find that financially constrained firms and firms with a large fraction of desired capacity expansion investments face significantly higher adjustment costs. During the crisis, financing restrictions did not increase adjustment costs, but capacity expansions did. Accordingly, effective policy interventions would have focused on subsidizing specific types of investments instead of providing general financial support to firms.
Keywords: Investment behavior, Partial adjustment, Adjustment costs, Survey data, Financial crisis
JEL Classification: D92, E22, G31
Suggested Citation: Suggested Citation