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Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric

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  • Livdan, Dmitry
  • Nezlobin, Alexander

Abstract

This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm’s capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm’s investment history. If capital goods have constant efficiency over a finite useful life, simple proxies are readily available for both the replacement cost of assets in place and capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We show these components exhibit significantly different economic determinants and behavior.

Suggested Citation

  • Livdan, Dmitry & Nezlobin, Alexander, 2021. "Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1444-1469.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:3:p:1444-1469
    DOI: 10.1016/j.jfineco.2021.05.021
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    More about this item

    Keywords

    Tobin’s Q; Investment; Capital stock; Replacement cost; Depreciation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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