NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Does Costly Reversibility Matter for U.S. Public Firms?

Hang Bai, Erica X.N. Li, Chen Xue, Lu Zhang

NBER Working Paper No. 26372
Issued in October 2019
NBER Program(s):Asset Pricing Program, Corporate Finance Program, Economic Fluctuations and Growth Program, International Finance and Macroeconomics Program, The Monetary Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w26372

 
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