DP8309 What Explains the Lagged Investment Effect?
Author(s): | Janice Eberly, Sérgio Rebelo, Nicolas Vincent |
Publication Date: | April 2011 |
Keyword(s): | Cash flow, Tobin's Q |
JEL(s): | E2 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=8309 |
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.