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What Explains the Lagged Investment Effect?

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  • Rebelo, Sérgio
  • Eberly, Janice
  • Vincent, Nicolas

Abstract

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano, Eichenbaum and Evans (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

Suggested Citation

  • Rebelo, Sérgio & Eberly, Janice & Vincent, Nicolas, 2011. "What Explains the Lagged Investment Effect?," CEPR Discussion Papers 8309, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8309
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    More about this item

    Keywords

    Cash flow; Tobin's q;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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