Investment, Capital Stock, and Replacement Cost of Assets when Economic Depreciation is Non-Geometric
62 Pages Posted: 19 Oct 2017 Last revised: 30 Dec 2020
Date Written: November 21, 2020
This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm's capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm's investment history. If capital goods have constant efficiency over a finite useful life, then simple proxies are readily available for both the replacement cost of assets in place and capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We then show that these components exhibit significantly different economic determinants and behavior.
Keywords: Investment; Tobin's Q; Vintage Capital; Capital Stock; Replacement Cost of Assets
JEL Classification: E22, G31
Suggested Citation: Suggested Citation