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Investment Behavior

Paper Session

Saturday, Jan. 7, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Chicago Ballroom VI
Hosted By: American Finance Association
  • Chair: David Sraer, University of California-Berkeley

Intangible Capital and the Investment-q Relation

Ryan Peters
,
University of Pennsylvania
Lucian Taylor
,
University of Pennsylvania

Abstract

The neoclassical theory of investment has mainly been tested with physical investment, but we show that it also helps explain intangible investment. At the firm level, Tobin’s q explains physical and intangible investment roughly equally well, and it explains total investment even better. Compared with physical capital, intangible capital adjusts more slowly to changes in investment opportunities. The classic q theory performs better in firms and years with more intangible capital: Total and even physical investment are better explained by Tobin’s q and are less sensitive to cash flow. At the macro level, Tobin’s q explains intangible investment many times better than physical investment. We propose a simple, new Tobin’s q proxy that accounts for intangible capital, and we show that it is a superior proxy for both physical and intangible investment opportunities.

Financing Durable Assets

Adriano Rampini
,
Duke University

Abstract

This paper studies the effect of durability on the financing of durable assets. We show that more durable assets require larger down payments of internal funds per unit of capital making them harder to finance, because durability affects the price of an asset and hence the overall financing need more than its collateral value. This insight has implications for the choice between new and used capital, technology adoption, and the rent versus buy decision. Constrained borrowers purchase used assets which are less durable than new assets and adopt less durable, low quality assets, that are otherwise dominated technologies. More durable assets are more likely to be rented given their larger financing need. Legal enforcement affects trade and technology adoption; weak legal enforcement economies are net importers of used assets and invest a larger fraction in less durable, low quality assets. There is a critical distinction between the pledgeability and durability of assets: pledgeability facilitates financing whereas the net effect of durability is to impede financing.

The Speculation Channel and Crowding Out Channel: Real Estate Shocks and Corporate Investment in China

Ting Chen
,
Hong Kong University of Science and Technology
Laura Xiaolei Liu
,
Peking University
Wei Xiong
,
Princeton University
Li-an Zhou
,
Peking University

Abstract

This paper uses detailed land transaction data of Chinese listed firms from 1998 to 2012 to analyze how real estate shocks affect corporate investment. In addition to the widely documented collateral channel, we also uncover two other channels: rising real estate prices induce more investment in commercial land unrelated to firms’ core businesses but reduce non-land investment (the speculation channel); rising real estate prices reduce debt capacity and corporate investment of firms without land ownership relative to land holding firms (the crowding out channel). Through these channels, we also find that real estate shocks lead to substantial capital misallocation both within and between firms: a 1-percentage-point increase in land price leads to 5-8 percentage points of TFP losses due to misallocation of capital.

Ripple Effects of Noise on Corporate Investment

Olivier Dessaint
,
University of Toronto
Laurent Fresard
,
University of Maryland
Adrien Matray
,
Princeton University

Abstract

Firms reduce investment in response to non-fundamental drops in the stock price of their product-market peers, as predicted by a model in which managers rely on stock prices as a source of information but cannot perfectly filter out noise in prices. The model also implies the response of investment to noise in peers' stock prices should be stronger when these prices are more informative, and weaker when managers are better informed. We find support for these predictions. Overall, our results highlight a new channel through which non-fundamental shocks to the stock prices of some firms influence real decisions of other firms.
Discussant(s)
Lukas Schmid
,
Duke University
Cecilia Parlatore
,
New York University
Charles Nathanson
,
Northwestern University
Adi Sunderam
,
Harvard Business School
JEL Classifications
  • G3 - Corporate Finance and Governance