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|
|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.