The role of non-convex costs in firms' investment and financial dynamics

Santiago Bazdresch

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

This paper shows that non-convex costs of financial adjustment are quantitatively relevant for explaining firm dynamics. First, empirically, financial activity is lumpy, more than investment activity. Second, non-convex costs are necessary, in the context of a dynamic investment and financing model, to rationalize this lumpiness. Two versions of the model, with and without non-convex costs, are compared. Only the non-convex costs version replicates the dynamics in the data, generating financial lumpiness higher than investment lumpiness. Other predictions of the model with respect to investment and finance are discussed.

Original languageEnglish (US)
Pages (from-to)929-950
Number of pages22
JournalJournal of Economic Dynamics and Control
Volume37
Issue number5
DOIs
StatePublished - May 1 2013

Keywords

  • Dynamic trade-off model
  • External financing costs
  • Financial frictions
  • Financial lumpiness
  • Investment

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