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Does Costly Reversibility Matter for U.S. Public Firms?

Author

Listed:
  • Bai, Hang

    (University of Connecticut - Department of Finance)

  • Li, Erica X. N.

    (Cheung Kong Graduate School of Business)

  • Xue, Chen

    (University of Cincinnati)

  • Zhang, Lu

    (Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER))

Abstract

Yes, most likely. The firm-level evidence on costly reversibility is even stronger than the prior evidence at the plant level. The firm-level investment rate distribution is highly skewed to the right, with a small fraction of negative investments, 5.79%, a tiny fraction of inactive investments, 1.46%, and a large fraction of positive investments, 92.75%. When estimated via simulated method of moments, the standard investment model explains the average value premium, while simultaneously matching the key properties of the investment rate distribution, including the cross-sectional volatility, skewness, and the fraction of negative investments. The combined effect of costly reversibility and operating leverage is the key driving force behind the model’s quantitative performance.

Suggested Citation

  • Bai, Hang & Li, Erica X. N. & Xue, Chen & Zhang, Lu, 2019. "Does Costly Reversibility Matter for U.S. Public Firms?," Working Paper Series 2019-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2019-25
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    Cited by:

    1. Leymann, Gunnar & Lundan, Sarianna, 2023. "From structural to transition effects: Institutional dynamism as a deterrent to long-term investments by MNEs," International Business Review, Elsevier, vol. 32(3).
    2. Kim, Yongjin & Kuehn, Lars-Alexander & Li, Kai, 2024. "Learning about the consumption risk exposure of firms," Journal of Financial Economics, Elsevier, vol. 152(C).
    3. Yuan, Liuchuang & Jiang, Jinglu & Mu, Congming & Chen, Tuyue, 2023. "Dynamic liquidity management with asymmetric adjustment costs," Finance Research Letters, Elsevier, vol. 58(PA).

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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