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

Tang, Sarah; Zhang, Jun; Shen , Jim Huangnan

doi:10.2139/ssrn.3739974

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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)

School of Management, Fudan University ; The Growth Lab, 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: 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