Neoclassical Investment Model Research Articles

The impact of climate policy on oil and gas investment: Evidence from firm-level data

Using a text-based firm-level measure of climate policy exposure, we show that climate policies have led to a global decline of 6.5 percent in investment among publicly traded oil and gas companies between 2015 and 2019, with European companies experiencing the most significant impact. Similarly, climate policy uncertainty has also had a negative impact. Our empirical results support the Neoclassical investment model. According to this model, firms pre-emptively cut investment in response to downward shifts in future demand. These findings contrast with the Green Paradox theory, which predicts an increase in current investment by oil and gas firms aimed at shifting extraction toward the present.

The Impact of Investments in Physical Capital, Labor, and Knowledge Capital on Enterprise Market Value: Estimation and Optimization

This study analyzes the market value of listed companies in Mainland China across different industries, including capital-intensive, labor-intensive, technology-intensive, and other industries. A generalized neoclassical investment model that considers physical capital, labor, and knowledge capital as input variables is built to theoretically decompose firm value. The empirical results indicate that knowledge capital accounts for an increasing proportion of the market value of companies, rising sharply from 21.5% in 2009 to 37.9% in 2018. In contrast, the share of labor in enterprise market value has been decreasing year by year, dropping from 56.5% in 2009 to 36.4% in 2018. The share of physical capital in enterprise market value remains relatively stable. Based on these findings, the study simulates the optimal investment behaviors and their influence on the firm value of various types of enterprises, providing valuable insights for investment decision-making for managers in different industries.

Quantum monte carlo for economics: Stress testing and macroeconomic deep learning

Computational methods both open the frontiers of economic analysis and serve as a bottleneck in what can be achieved. We are the first to study whether Quantum Monte Carlo (QMC) algorithm can improve the runtime of economic applications and challenges in doing so. We provide a detailed introduction to quantum computing and especially the QMC algorithm. Then, we illustrate how to formulate and encode into quantum circuits (a) a bank stress testing model with credit shocks and fire sales, (b) a neoclassical investment model solved with deep learning, and (c) a realistic macro model solved with deep neural networks. We discuss potential computational gains of QMC versus classical computing systems and present a few innovations in benchmarking QMC.

The Determinants of Private Fixed Investment and the Relationship between Public and Private Capital Accumulation in Turkey

The purpose of this study is to analyse the determinants of private fixed investment spending in Turkey over the period 1970-96, which covers years of both financial repression and financial liberalisation. A reformulated neoclassical investment model and a reformulated flexible accelerator investment model have been tested for the Turkish economy. The results obtained support the accelerator principle and the crowding out hypothesis, that is, public and private sector investments have been found to be substitutes. Furthermore, the hypothesis that the volume of funds is as important as the cost of funds used in financing private fixed investment has been verified. On the other hand, the so-called McKinnon-Shaw hypothesis has not been completely verified because the effect of the medium-term real lending rate on private fixed investment has been found to be negative but statistically insignificant. Finally, the financial and liberalisation programmes that have been implemented since 1983 have not yet shown any noticeable positive effects on private investment.

Do liquidity constraints affect the investment decisions of California hospitals?

We explore how hospitals' liquidity constraints affect investment decisions for two types of hospital investments: general and health information technology capital investment. In the literature, only one dimension of the investment strategy, namely cash flow, has been examined empirically. Using the neoclassical model of investment and annual hospital financial data from California's Office of Statewide Health Planning and Development (OSHPD) from 1997 to 2007, we investigate the impacts of liquidity constraints such as cash flow and marginal profitability of capital on investment decisions across hospital ownership types. The system GMM estimation results reveal that hospitals face liquidity constraints for general capital investment, and these constraints are more pronounced in nonprofit hospitals than in for-profit or government-owned hospitals. However, they are not liquidity constrained for health IT capital investments. This represents that liquidity constraints are not the cause of the low health IT investment of California hospitals.

Decomposing firm value

What are the economic determinants of a firm’s market value? We answer this question through the lens of a generalized neoclassical model of investment with quasi-fixed labor and three heterogeneous capital inputs. We estimate the structural model using firm-level data on US firms and find that, on average and depending on the industry, installed labor force accounts for 14–21% of firms’ market value, physical capital accounts for 30–40%, knowledge capital accounts for 20–43%, and brand capital accounts for 6–25%. Our analysis provides direct empirical evidence for the importance of labor and intangible capital inputs for understanding firm value.

When Does Greenwashing Pay Off?

I construct a neoclassical model of investment for a firm that greenwashes its commitment to corporate social responsibility in exaggerating its minimization of using polluting inputs and maximizing its investment in social capital. I assume that greenwashing allows the firm some pricing power in its output market, but in tradeoff, it results in a dead weight loss due to the risk of being caught greenwashing that acts as a negative call option on the increased value of the firm. I find that there are limited circumstances where greenwashing pays off for the firm: when firm volatility is low, when the time till they expect to be caught is short, when interest rates are high and when their pricing power is high. As a result, without government intervention, the circumstances that favor greenwashing are very limited.

Can Capital Adjustment Costs Explain the Decline in Investment-Cash Flow Sensitivity?

It is well documented that since at least the 1970s investment-cash flow (I-CF) sensitivity has been decreasing over time to disappear almost completely by the late 2000s. Based on a neoclassical investment model with costly external financing, we show that this pattern can be explained by the gradual increase of capital adjustment costs. The result is corroborated in the supplementary analysis that exploits the cross-country and cross-industry variation of capital adjustment costs, as proxied by the level of technological advancement. More generally, our findings demonstrate that I-CF sensitivity should only be interpreted as a joint measure of financial and real frictions.

Econometric Analysis of the Impact of Taxes on Private Investment in Sub-Sahara Africa

This study examines the impact of taxation and other macroeconomic factors on private investment in sub-Saharan Africa, taking the case of East African Community (EAC) and Southern African Development Community (SADC) countries. By estimating a dynamic neo-classical investment model for developing countries using One-Step Difference GMM, the empirical results indicate that corporate income tax (CIT) and Value Added Tax (VAT) have significant and negative effect on private investment. The results also show that real interest rate is an important factor that explains the level of private investment in the EAC and SADC countries. Credit to private sector, though found to be statistically significant, the results suggests its effect is unexplainably negative and inconsistent with economic theories. The study finds no evidence, however, on the impact of personal income taxes, real Gross Domestic Product (GDP) growth rate, nominal exchange rate and inflation rate on private investment. On the policy front, the study findings indicate that, governments from the two economic blocs need to consider lowering the corporate income tax and VAT tax rates if they are to promote and attract more private investments. Lowering interest rates through the monetary policy channel is also recommended to make their economies more attractive to potential investors.

Determinants of firm-level investment in India: does size matter?

ABSTRACTThe study estimates the dynamic panel version of augmented neoclassical investment model using ARDL specification. There are evidence in support of interest rate and credit channels of monetary transmission. Our evidence of interest rate channel is robust and is not driven by outliers on the basis of size, investment to capital and cash flow to capital ratio. We also correct for the presence of financially distressed and constrained firms. The heterogeneous impact of cash flow to capital stock ratio on investment spending of small and large firms provides further evidence in favour of working of credit channel.

A theoretical model of imperfect markets and investment

Empirical evidence suggests that market imperfections affect firm investment choices, while the theoretical mechanisms underlying such findings are still unexplored. This paper attempts to model the contemporaneous impact of financial and labor market imperfections on investment. A neoclassical investment model with costly external finance is augmented by adjustment costs of investment affected by the level of labor market regulation. Results show that the impact of labor market regulation and its interaction with financial market imperfections on investment depends on the tightness prevailing in the firm production environment. Labor market regulation has a larger effect on investment in the presence of more efficient financial markets. Findings suggest that as long as the firm is operating below its potential output, an increase in labor regulation might stimulate the need for firms to substitute labor with capital investment, and this impact is greater the higher the efficiency in the financial market.

Decomposing Firm Value

What are the economic determinants of a firm's market value? We answer this question through the lens of a generalized neoclassical model of investment with physical capital, quasi-fixed labor, and two types of intangible capital, knowledge and brand capital. We estimate the structural model using firm-level data on U.S. publicly traded firms and use the estimated parameter values to infer the contribution of each input for explaining firm's market value in the last four decades. The model performs well in explaining both cross-sectional and time-series variation in firm's market values across industries, with a time-series R2 of up to 61%, and a cross-sectional R2 of up to 95%. The relative importance of each input for firm value varies across industries and over time. On average, physical capital accounts for 30% to 40% of firm's market value, installed labor force accounts for 14% to 22%, knowledge capital accounts for 20% to 43%, and brand capital accounts for 6% to 25%. The importance of physical capital for firm value decreased in the last decades, while the importance of knowledge capital increased, especially in high-tech industries. Our analysis provides direct empirical evidence for the importance of labor and intangible capital inputs for understanding firm value.

Investment Dynamics and Earnings‐Return Properties: A Structural Approach

ABSTRACTWe propose the standard neoclassical model of investment under uncertainty with short‐run adjustment frictions as a benchmark for earnings‐return patterns absent accounting influences. We show that our proposed benchmark generates a wide range of earnings‐return patterns documented in accounting research. Notably, our model generates a concave earnings‐return relation, similar to that of Basu [1997], and predicts that the earnings‐return concavity increases with the volatility of firms’ underlying shock processes and decreases with the level of firms’ investments. We find strong empirical support for these predictions. Overall, our evidence suggests that our proposed benchmark is useful for understanding the joint dynamics of variables of interest to accounting research (e.g., earnings, returns, investment, market‐to‐book) absent accounting influences, a necessary precondition for inferring the effects of accounting from these dynamics.

Measuring and Interpreting Countries’ Tax Attractiveness for Investments in Digital Business Models

This article analyses the tax attractiveness of locations for investments in digital business models. It identifies and assesses relevant tax rules affecting domestic and cross-border digital business models across thirty-three countries. The computation of average effective tax rates is based on the neoclassical investment model of Devereux/Griffith. Our results help to evaluate tax-related location factors in the digital economy by combining the most relevant tax parameters and rules for taxable nexus in an objective measure. We find that investments in digital business models face generally lower average effective tax rates than those in traditional business models since a high share of investment costs is immediately expensed and a higher share of activities falls within the scope of countries’ tax incentives for R&D input and/or output. While more generous depreciation rules for digital investments such as software make countries relatively more attractive, our results are mostly driven by statutory tax rates, special incentive schemes such as Intellectual Property (IP) Boxes, R&D credits, and super-deductions. Overall, we acknowledge an increasing trend in tax competition for digital businesses.

The macro determinants of firms' and households' investment: Evidence from Italy

Using under-exploited institutional sector account data, we assess the main drivers of both firms' and households' investment in Italy over the past two decades. We thus test the validity of the flexible neoclassical model of investment for both sectors, in particular by exploring the significance of additional drivers to output and to the real user cost of capital and by assessing both feedback effects and short- and long-run linkages across all variables in a vector error correction framework. Our findings support the neoclassical model in the long run. However, in the short run, both firms' and households' capital accumulation is found to have been dampened by a rise in uncertainty, a deterioration in confidence, as well as by higher indebtedness and by tighter financing constraints. Moreover, we find that disregarding the role of these short-run variables hinders the understanding of investment dynamics in Italy, especially in the most recent recessionary years.

Dynamic Investment Models in Accounting Research

This monograph presents three variants of the neoclassical investment model and characterizes the firm's optimal investment policy, equity value, and the desirable properties of accrual accounting rules in each setting. Two main questions are considered: (1) What accounting rules result in the most informative financial statements from the perspective of investors seeking to value the firm's equity? and, (2) What accounting rules can be efficiently used by shareholders in evaluating the performance of better informed managers? One accounting treatment, referred to as replacement cost accounting, achieves efficiency along both dimensions. The notion of replacement cost studied in this monograph corresponds closely to that of fair value, as defined in IFRS 13, in that it is defined as either: (i) the current price of the capital goods in a perfectly competitive market, if such a market is available, or (ii) the hypothetical amount that would have to be incurred today to replace the current and future capacity of the capital goods in question. While the replacement cost rule is, in many settings, unique in providing the firm's shareholders with sufficient information for precise equity valuation, the problem of efficient performance measurement is generally less informationally demanding. For example, under certain plausible conditions, the owners can incentivize a better informed manager to make efficient investment decisions using the straight-line depreciation method.

Business Investment, Cost of Capital and Uncertainty in the United Kingdom Evidence from Firm-Level Analysis

We use new firm-level estimates of the cost of capital and uncertainty to study the drivers of UK business investment in a neoclassical investment model. We construct firm-specific measures of the cost of capital and uncertainty and use new UK survey data to estimate firm-specific investment hurdle rates. There is substantial variation in the cost of capital and uncertainty faced by firms and we find both matter for investment. Firm heterogeneity might help explain the difference in firms’ investment paths shortly after the Great Recession. This suggests that, while common shocks, that is, aggregate uncertainty matters, it is also important to capture firm-specific uncertainty to better explain investment dynamics. Overall, between 2000 and 2015 investment responded relatively sluggishly to the cost of capital and more sharply to uncertainty, especially after the financial crisis. There are implications for monetary and macroeconomic policy. The relative importance of measures that alleviate uncertainty compared to changes in monetary policy rates could be larger than generally recognised.

Convergence in Corporate Investments

We provide robust empirical evidence of size effects in corporate investments. Small firms have significantly higher investment rates than large firms, even after controlling for standard empirical proxies of firm real investment opportunities and financial status, including Tobin’s Q and cash flow. Firm size is at least as important as Tobin’s Q and cash flow, both economically and statistically, in explaining variation in corporate investments. Unlike the cash flow effect, however, the size effect is robust to measurement error in Tobin’s Q. Contrary to common wisdom, the empirical evidence suggests that firm size improves the measurement of firms’ real investment opportunities rather than reflecting differences in firms’ financing frictions. Using simulated method of moments, we estimate a neoclassical model of investment and show that technological decreasing returns to scale, along with measurement error in Tobin’s Q, replicates successfully the empirical evidence on size effects.

Investment Dynamics and Earnings-Return Properties: A Structural Approach

We propose the standard neoclassical model of investment under uncertainty with short-run adjustment frictions as a benchmark for earnings-return patterns absent accounting influences. We show that our proposed benchmark produces a number of earnings-return relations commonly attributed to accounting influences. In particular, we document that the relation between earnings and returns is naturally concave (as documented by Basu (1997)) given short-run adjustment frictions and long-run optimal investment behavior. We explain the model intuition, estimate its key parameters, test its empirical predictions, and discuss the implications of our proposed benchmark for the accounting literature. We suggest that our benchmark for earnings and return properties absent accounting influences is useful in identifying the incremental effect of accounting after considering first-order economic influences in a wide number of contexts and can, therefore, contribute to the improvement of existing measures of and approaches to identifying accounting-related effects.

The balance sheet channel of monetary policy: the panel evidence of Egypt

ABSTRACTThis paper examines the effects of monetary policy on firms’ investments in Egypt using disaggregated data and generalized method of moments (GMM) technique. It develops the neoclassical investment model by adding the interaction between user cost of capital and cash flow (CF). Therefore, monetary policy affects investment through three effects: user cost of capital, CF and interaction between them. Using a sample of 124 firms, the empirical finding supports the relevance of balance sheet channel (BSC) and the heterogeneous effect of monetary policy on investment. This finding signals that monetary authority should take cognizance of the stability of interest rate to stabilize firm-level investment.