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How Do Frictions Affect Corporate Investment? A Structural Approach

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  • Bustamante, M. Cecilia

Abstract

This paper provides a structural approach to testing investment equations based on the log-likelihood function of a nonlinear investment rule. The analysis integrates the predictions of the q-theory for the commonly studied active region of investment and provides new inferences on how real and financing frictions affect the probability that a firm invests. The empirical findings are consistent with the macro-finance literature suggesting that q-theory models with nonconvex investment frictions better explain the data. I also find that both real and financing costs of investment are related to the capital intensity of the industry in which firms operate.

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  • Bustamante, M. Cecilia, 2016. "How Do Frictions Affect Corporate Investment? A Structural Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(6), pages 1863-1895, December.
    • Handle: RePEc:cup:jfinqa:v:51:y:2016:i:06:p:1863-1895_00
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