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Estimating irreversible investment with financial constraints: an application of switching regression models

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  • Hirokatsu Asano

Abstract

This analysis investigates irreversible investment with financial constraints. When investment is irreversible, zero investment can be optimal and investment becomes lumpy. Because external funds are not a perfect substitute for internal funds, financially constrained firms invest differently than unconstrained firms. To incorporate both irreversibility and financial constraints into estimations, the analysis develops a switching regression model that depends on the real options theory of capital investment. The analysis investigates three US industries: the oil refining, communications equipment manufacturing and semiconductor manufacturing industries. The analysis shows that internal funds affect investment if a firm is financially constrained.

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  • Hirokatsu Asano, 2010. "Estimating irreversible investment with financial constraints: an application of switching regression models," Applied Economics, Taylor & Francis Journals, vol. 42(2), pages 211-222.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:2:p:211-222
    DOI: 10.1080/00036840701579218
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    Cited by:

    1. Hyun Seok Kim & B. Wade Brorsen, 2012. "Can real option values explain apparent storage at a loss?," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2081-2090, June.

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