FEEM working papers "Note di lavoro" series
2001 .088

Capital Heterogeneity: Does it Matter? Fundamental Q and Investment on a Panel of Italian Firms


Authors: Paola Rota, Elena Bontempi, Alessandra Del Boca, Alessandra Franzosi
Series: Economy and Society
Editor: Fausto Panunzi
Type: Journal
Keywords: Investment,Q,heterogeneous capital goods,VAR estimation,panel data
JEL n.: D24,G31,C33,C34
JEL: Rand Journal of Economics
Pages: 35 675-690
Date: 2004

Abstract

In this paper we study the determinants of investment decisions at the firm level with heterogeneous capital goods. We exploit a newly developed panel dataset of small and medium-sized firms which allows us to distinguish between purchases, sales, and net acquisitions of capital goods. We distinguish between equipment and structures and test the assumption of convex adjustment costs. Since our firms are mostly unlisted, the standard Q model based on stock market valuation is no longer appropriate. Instead, we use the fundamental Q approach proposed by Abel and Blanchard (1986) and Gilchrist and Himmelberg (1995) and extend it to the case of several capital inputs. The results show that the standard convex costs model fits very well equipment and but not structures. We find evidence for non-convexities in the case of structures.

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