Estimating irreversible investment with financial constraints: an application of switching regression models
Abstract:This analysis investigates irreversible investment with financial constraints. When investment is irreversible, zero investment can be optimal and investment becomes lumpy. Because external funds are not a perfect substitute for internal funds, financially constrained firms invest differently than unconstrained firms. To incorporate both irreversibility and financial constraints into estimations, the analysis develops a switching regression model that depends on the real options theory of capital investment. The analysis investigates three US industries: the oil refining, communications equipment manufacturing and semiconductor manufacturing industries. The analysis shows that internal funds affect investment if a firm is financially constrained.
Document Type: Research Article
Affiliations: Department of Economics, Asia University, Tokyo, Japan 180-8629
Publication date: 2010-01-01