Working Paper: NBER ID: w26372
Authors: Hang Bai; Erica X. N. Li; Chen Xue; Lu Zhang
Abstract: Yes, most likely. The firm-level evidence on costly reversibility is even stronger than the prior evidence at the plant level. The firm-level investment rate distribution is highly skewed to the right, with a small fraction of negative investments, 5.79%, a tiny fraction of inactive investments, 1.46%, and a large fraction of positive investments, 92.75%. When estimated via simulated method of moments, the standard investment model explains the average value premium, while simultaneously matching the key properties of the investment rate distribution, including the cross-sectional volatility, skewness, and the fraction of negative investments. The combined effect of costly reversibility and operating leverage is the key driving force behind the model’s quantitative performance.
Keywords: costly reversibility; investment rates; value premium; simulated method of moments
JEL Codes: E22; E44; G12; G14; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| costly reversibility (D61) | investment rate distribution (E25) |
| costly reversibility (D61) | fraction of negative investment rates (E43) |
| costly reversibility (D61) | fraction of positive investment rates (G11) |
| costly reversibility + operating leverage (G32) | investment patterns (G11) |
| downward adjustment cost > upward adjustment cost (L11) | investment behavior (G11) |
| investment model (via SMM) (G11) | average value premium (G52) |