International evidence on investment and fundamentals

Janice C. Eberly*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

55 Scopus citations

Abstract

If a firm's costs of installing capital are not quadratic, then its optimal investment is not a linear function of fundamentals, such as the returns and costs of capital. This study specifies a model in which a firm may face fixed, linear, and convex costs of investing, and estimates the resulting investment function using firm-level data from 11 countries. The evidence suggests important nonlinearities, consistent with the presence of fixed or other non-quadratic costs, in the relationship between investment and fundamentals for most countries. These findings are statistically signficant at the level of the firm, and economically significant when aggregated by country.

Original languageEnglish (US)
Pages (from-to)1055-1078
Number of pages24
JournalEuropean Economic Review
Volume41
Issue number6
DOIs
StatePublished - Jun 1997

Keywords

  • Adjustment costs
  • Capital
  • Investment
  • Irreversibility

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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