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.