Plutarchos Sakellaris

Nonlinear response of firm investment to Q:: Testing a model of convex and non-convex adjustment costs1

Abstract Abel and Eberly (1994) study optimal investment behavior in the presence of flow fixed costs, proportional costs and convex costs. A clear prediction is that investment will alternate between regimes of insensitivity and responsiveness to q separated by unknown threshold levels of q . At the firm level, we find evidence for different regimes of sensitivity to q but not for a regime of zero sensitivity. Our finding that investment has a nonlinear relationship to q is important because it implies an elasticity of aggregate investment to q (and fundamentals) that is high and variable over time.

Quantifying Embodied Technological Change

We estimate the rate of embodied technological change directly from plant-level manufacturing data on current output and input choices along with histories on their vintages of equipment investment. Our estimates range between 8 and 17 percent for the typical U.S. manufacturing plant during the years 1972-1996. Any number in this range is substantially larger than is conventionally accepted with some important implications. First, the role of investment-specific technological change as an engine of growth is even larger than previously estimated. Second, existing producer durable price indices do not adequately account for quality change. As a result, measured capital stock growth is biased. Third, if accurate, the Hulten and Wykoff (1981) economic depreciation rates may primarily reflect obsolescence.

Patterns of Plant Adjustment

This paper provides a description of the dynamic choices of manufacturing plants when they undertake rapid adjustment in output. The focus is on epsodes that involve lumpy adjustment in capital or employment. I examine the behavior of variables such as capital utilization, hours per worker, overtime use, capacity utilization, materials and energy use. Finally I describe the observed patterns of productivity during those adjustment episodes and propose some hypotheses that seem to fit them. The costs associated with output adjustment seem to arise form building and destroying a particular organizaqtion of the structure of production and associated worker experience. As such they are related to learning-by-doing and investment in specific training.

Human capital formation and business cycle persistence

Abstract In this paper we examine the role of the formation of human capital in propagating shocks over the business cycle. We show that a two-sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post-war US data. A key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital.

A NEW LOOK AT FIRM MARKET VALUE, INVESTMENT, AND ADJUSTMENT COSTS

We demonstrate that the conventional practice of running firm investment regressions on beginning-of-period average Q cannot recover structural parameters related to adjustment costs. We propose two new methods of estimating these structural parameters by using financial market information (average Qs). We find that the sensitivity of investment to Q is more than ten times higher than estimated in conventional Q regressions. Furthermore, a firms investment rate is more responsive to expected future Q the higher the level of this Q; i.e., investment is a convex function of fundamentals. The cost of installing new capital is estimated to be approximately 10 to 13 of the total investment cost (including purchase) at usual rates of investment.

Irreversible Capital and the Stock Market Response to Shocks in Profitability

This paper develops a vintage model of capital accumulation to identify the structural linkage between shocks to input or output prices and a firms stock-market value. The model accounts for a substantial part of the sample variation in excess returns, thus providing evidence for a systematic link between the stock-market valuation of firms and the economic factors that affect their profitability. The 1973-74 oil shock is shown to have had a strong impact on excess returns; firms whose capital consisted of vintages built when energy was relatively cheap were hit the hardest in value. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The contribution of Information and Communication Technology investments to Greek economic growth: An analytical growth accounting framework ☆

Information and Communication Technology (ICT) investments are the driving force behind the resurgence of growth in the developed countries during recent years. They are also the main reason for the increased growth rates of Total Factor Productivity (TFP). In this paper, we examine whether these relationship also hold for Greece. We use a neoclassical growth accounting model to identify the sources of growth and more specifically the role of ICT investments. We find that the contribution of ICT investments has increased during the period 1988-2003, but that this contribution is still lower than in the United States. During 1996-2003, ICT capital services contributed 0.75 to the total growth rate. We also examine the role of ICT investments at the industry level; we find that ICT investments have most benefited the Finance, Insurance, Real Estate and Business Services industries, and the Wholesale and Retail Trade industries. Finally, our results show that growth rates of TFP have also risen, a necessary condition to maintain the high growth rates of productivity in the future.

Production function estimation with industry capacity data

This paper introduces a new data set for the analysis of productivity in U.S. manufacturing. It consists of data on production and input levels when the plants in an industry operate at capacity. The estimates are consistent with those obtained using data on actual operations from the ASM. As an application, I use this data to estimate the rate of growth of technological change that is embodied in equipment capital. The estimates imply a larger role of equipment investment and embodied technological change on economic growth than is conventionally assumed.

Estimating computer depreciation using online auction data

Personal computer prices decline rapidly with age. The price of a four-year-old used computer is almost one tenth of the price of a new one. This paper provides new evidence on why prices of personal computers decline so rapidly as they age, using online auction data from eBay. An innovative feature of the dataset is that it contains actual transaction prices for both desktops and notebooks, as well as exact age in days. By using a sample of used Dell computers, we examine the causes of this rapid decline. We find that age is not important due to minimal physical deterioration. Prices decline because used computers have inferior technical characteristics compared to new ones. In addition, a computer loses about 20–25 percentage points of its value the instant that it is sold. Finally, some auction characteristics are significant.

On the Valuation of Large Systemic U.S. Banks

We examine the stock market valuation of large and systemic U.S. banks over the period 2003Q4-2014Q1. These are the banks included in a series of supervisory capital review and stress tests conducted annually since 2009 by the Federal Reserve. We extend Gordon’s growth model of stock valuation, allowing both dividend and cost of equity to be variable over time. We establish a dynamic relationship between the market price-to-book ratio of equity and measures of the cost of equity, the expected growth of net income and modified dividend payout ratio. We find that the price-to-book ratio of equity is a valid valuation model. We also find large heterogeneity in the degree to which market price-to-book ratios of these banks are temporarily above or below their long-run equilibrium valuation. These divergences are persistent over time with only about a quarter of the gap closing each quarter. Price-to-book ratios under-react to changes in fundamental variables. So, good news leads temporarily to relative undervaluation and bad news to relative overvaluation.We also show that the observed short-run divergences of market from fundamental price-to-book ratios are related systematically to observable bank characteristics. These relationships are not immutable as many patterns changed after the recent financial crisis. In particular, before the crisis, the market tended to temporarily overvalue leverage and asset growth but these patterns came to an end with the onset of the crisis. Finally, we examine the role of bank opacity and find that after the crisis higher bank opacity is associated with higher discounts of market from fundamental valuation in the short run. Market sentiment contributes to such divergences also. Periods of higher exuberance in the financial markets are associated with higher relative overvaluation.