38 Pages Posted: 6 Dec 2005 Last revised: 19 Nov 2013
Date Written: June 1, 2011
This paper shows that non-convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics. First, empirically, financial activity is lumpy, more than investment activity. Second, non-convex costs are necessary, in the context of a dynamic investment and financing model, to rationalize this lumpiness. Two versions of the model, with and without non-convex costs, are compared. Only the non-convex costs version replicates the dynamics in the data, generating financial lumpiness higher than investment lumpiness. Other predictions of the model with respect to investment and finance are discussed.
Keywords: Financial frictions; External financing costs; Investment; Dynamic trade-off model; Financial lumpiness
JEL Classification: E22; E42; E44; G31; G32; G33
Suggested Citation: Suggested Citation
Bazdresch, Santiago, The Role of Non-convex Costs in Firms' Investment and Financial Dynamics (June 1, 2011). Journal of Economic Dynamics and Control, Vol. 37, No. 5, 2013. Available at SSRN: https://ssrn.com/abstract=867045 or http://dx.doi.org/10.2139/ssrn.867045