Can Capital Adjustment Costs Explain the Decline in Investment-Cash Flow Sensitivity?

Liao, Shushu and Nolte, Ingmar and Pawlina, Grzegorz (2023) Can Capital Adjustment Costs Explain the Decline in Investment-Cash Flow Sensitivity? Journal of Financial and Quantitative Analysis. ISSN 0022-1090 (In Press)

[img]
Text (JFQA-21-22062_R2_accepted)
JFQA_21_22062_R2_accepted.pdf - Accepted Version
Available under License Creative Commons Attribution-NonCommercial-NoDerivs.

Download (696kB)

Abstract

It is well documented that since at least the 1970s investment-cash flow (I-CF) sensitivity has been decreasing over time to disappear almost completely by the late 2000s. Based on a neoclassical investment model with costly external financing, we show that this pattern can be explained by the gradual increase of capital adjustment costs, attributable to the accumulation of knowledge capital. The result is robust to a variety of approaches, including Euler equation estimation and the simulated method of moments. More generally, our findings demonstrate that I-CF sensitivity should only be interpreted as a joint measure of financial and real frictions.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial and Quantitative Analysis
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1402
Subjects:
ID Code:
184824
Deposited By:
Deposited On:
24 Jan 2023 11:30
Refereed?:
Yes
Published?:
In Press
Last Modified:
28 Jan 2023 01:22