Volatility, Adjustment Cost and Capital Misallocation: Evidence from Chinese Industrial Firms

30 Pages Posted: 4 Mar 2021 Last revised: 5 Nov 2021

See all articles by Sarah Tang

Sarah Tang

Department of Economics, Suffolk University

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Jim Huangnan Shen

School of Management, Fudan University ; Center for International Development, Harvard Kennedy School, Harvard University; Core China Research Center, School of Economics and Business, University of Navarra

Date Written: January 4, 2021

Abstract

This paper investigates the impact of volatility in profitability shock and capital adjustment cost on aggregate total factor productivity (TFP) in Chinese industries firms. To quantify the effects of volatility and adjustment costs on aggregate TFP, we recover key structural parameters in a dynamic optimization problem, so the model is able to replicate salient features observed from the firm-level data. Our result shows that volatility leads to considerable loss in aggregate TFP, while the role of adjustment cost is limited but significant.

Keywords: volatility, capital adjustment cost, capital misallocation, aggregate TFP, China

JEL Classification: D24, O10, P31

Suggested Citation

Tang, Sarah and Zhang, Jun and Shen, Jim Huangnan, Volatility, Adjustment Cost and Capital Misallocation: Evidence from Chinese Industrial Firms (January 4, 2021). Available at SSRN: https://ssrn.com/abstract=3739974 or http://dx.doi.org/10.2139/ssrn.3739974

Sarah Tang (Contact Author)

Department of Economics, Suffolk University ( email )

Boston, MA 02108
United States

HOME PAGE: http://https://sites.google.com/site/sarahletang0610/

Jun Zhang

Fudan University - China Center for Economic Studies (CCES) ( email )

China

Jim Huangnan Shen

School of Management, Fudan University ( email )

Shanghai
China

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Core China Research Center, School of Economics and Business, University of Navarra ( email )

Camino del Cerro del Aguila, 3
Pamplona, Navarra 31080
Spain

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