How and When Do Firms Adjust Their Investments Toward Targets?

Elsas, Ralf and Klepsch, Catharina (2016): How and When Do Firms Adjust Their Investments Toward Targets? SSRN

Abstract

Crisis-induced welfare losses, due to a decrease in investments and GDP, could have been mitigated by targeted policy measures, if policy makers had known firms' investment demand. Using unique survey data on firms' investment targets, we analyze i) adjustment costs of firm investments and ii) the impact of the recent crisis on adjustment costs. We find that financially constrained firms and firms with a large fraction of desired capacity expansion investments face significantly higher adjustment costs. During the crisis, financing restrictions did not increase adjustment costs, but capacity expansions did. Accordingly, effective policy interventions would have focused on subsidizing specific types of investments instead of providing general financial support to firms.

• Item Type: Paper
• Keywords: Investment behavior, Partial adjustment, Adjustment costs, Survey data, Financial crisis
• Faculties: Munich School of Management > Institute for Finance and Banking
• Subjects: 300 Social sciences > 330 Economics
• ISSN: 1556-5068
• Language: English