Robert S. Chirinko

How responsive is business capital formation to its user cost?: An exploration with micro data

Abstract The response of business capital formation to its user cost is critical to evaluating tax reform, deficit reduction, and monetary policy. Evidence for a substantial user cost elasticity, however, is sparse. Most evidence has been based on aggregate data, although several recent studies with firm-level data report substantial effects. With a particularly rich micro dataset containing over 26,000 observations, this paper explores what can be learned about the user cost elasticity. While the results depend to some extent on the specification and econometric technique, various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately −0.25. This paper is dedicated to the memory of Robert Eisner, who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper.

Testing Static Tradeoff Against Pecking Order Models of Capital Structure: A Critical Comment

In a recent paper, Shyam-Sundar and Myers (1999) introduce a new test of the Pecking Order Model. This comment shows that their elegantly simple test generates misleading inferences when evaluating plausible patterns of external financing. Our results, coupled with the power problem with the Static Tradeoff Model documented by Shyam-Sunder and Myers, indicate that their empirical evidence can evaluate neither the Pecking Order nor Static Tradeoff Models. Alternative tests are needed that can identify the determinants of capital structure and can discriminate among competing hypotheses.

Why Does Liquidity Matter in Investment Equations

That liquidity variables affect investment spending is widely accepted. Despite important recent empirical work, questions remain concerning the interpretation of liquidity variables in investment equations and the sources and economic importance of finance constraints. These questions are addressed by estimating a variety of econometric models that exploit distinctive Canadian institutional features to identify firms that face relatively severe information problems. The initial econometric evidence confirms the existence of finance constraints, and identifies their source as the problems faced by firms in credibly communicating private information to outsiders. This conclusion is robust to biases from the capitalization of finance constraints into asset prices, scale economies, or imperfect competition, which are accounted for directly in the econometric specifications. Copyright 1995 by Ohio State University Press.

Tobin's Q and financial policy

Recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and the need for working with optimizing models. Tobin’s Q model of investment would appear to provide a framework that can satisfy these two criteria. In contrast to the original presentation of the Q model, the formal development has not recognized that the firm actively participates in a number of financial markets; in this broader context, we show that Q is likely to be an uninformative and possibly misleading signal for investment expenditures . We then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with Q models, but the modifications dictated by the theory receive little support from the data.

Finance, control and profitability: the influence of German banks

Abstract Bank intermediated finance has been cited frequently as the preferred means for channeling funds from savers to firms. Germany is the prototypical economy where powerful universal banks allegedly exert substantial influence over firms. Despite frequent assertions about the advantages of a bank relation, empirical support is mixed. With a unique dataset and a focus on the fragility/sturdiness of inferences, this paper evaluates German bank influence in terms of three hypotheses: (1) do bank influenced firms enjoy lower finance costs? (No); (2) is bank influence a solution to control problems? (Yes); (3) do bank influenced firms have higher profitability? (No).

Bubbles, fundamentals, and investment: a multiple equation testing strategy

Abstract Dramatic fluctuations in the stock market raise questions about whether actual asset prices correspond to the expected present value of future cash flow and whether deviations from this fundamental price can affect real investment spending. Even if there are deviations from fundamental price, they may not distort real behavior if firms ignore these deviations in making their investment decisions. On the other hand, overvaluation of equities could provide firms with a relatively cheap source of finance and might therefore influence investment. To evaluate these issues, this paper introduces a new econometric testing strategy, and assesses the existence of stock market bubbles and the sensitivity of investment spending to bubbles. We estimate the Q and Euler equations in a simultaneous equations model and exploit the idea that these equations reflect different information about the stock market and investment spending. Based on U.S. data for 1911–1987, our formal statistical tests indicate that bubbles exist but real investment decisions are based on fundamentals. A variety of robustness checks and three types of collateral evidence corroborate this interpretation.

A New Approach to Estimating Production Function Parameters: The Elusive Capital–Labor Substitution Elasticity

Parameters of taste and technology are central to a wide variety of economic models and issues. This article proposes a simple method for estimating production function parameters from panel data, with a particular focus on the elasticity of substitution between capital and labor. Elasticity estimates have varied widely, and a consensus estimate remains elusive. Our estimation strategy exploits long-run variation and thus avoids several pitfalls, including difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules, that can bias the estimated elasticity. Our results are based on an extensive panel comprising 1860 firms. Our approach generates a precisely estimated elasticity of 0.40. Although existing estimates range widely, we document a remarkable convergence of results from two related approaches applied to a common dataset. The method developed here may prove useful in estimating other structural parameters from panel datasets.

Multiple capital inputs, Q, and investment spending

Despite their explicit treatment of dynamics and solid theoretical basis, investment models based on the Brainard-Tobin Q have recorded a generally disappointing empirical performance. When the Q model is expanded to recognize the possibility that the value of the firm depends on two or more capital inputs with differing adjustment cost technologies, the econometric equation following from optimizing behavior includes Q as well as a set of additional explanatory variables. The importance of these omitted variables is assessed, and the capital homogeneity assumption for equipment and structures implicit in Conventional Q models is rejected. The Multi-Capital Q model is then extended in two ways: (i) adding inventory, research and development, and labor as quasi-fixed factors and (ii) exploring the sensitivity of the instrumental variables estimates to normalization. We conclude that the Multi-Capital Q model is a useful extension that overcomes an important omitted variables problem in the Conventional Q framework.

A framework for assessing credit risk in depository institutions: Toward regulatory reform

Abstract This paper develops and illustrates a new method for evaluating the credit risk borne by depository institutions that may prove to be an important element in a regulatory mechanism sensitive to risk. In our framework, depository institutions are forced to bear the costs of their risk-exposure and hence to internalize this cost when extending loans. Using various loan portfolios and alternative macroeconomic scenarios, we present numerical calculations demonstrating the ability of our framework to capture variations in risk-exposure and highlighting the significance of portfolio concentrations. These calculations are based on an important new source of information that permits an econometric analysis of loan losses by industry.

Market Power and Inflation

Market power exercised by firms has become central to macroeconomics. Recent theoretical work highlights the importance of the relation between market power and inflation. We examine this relation for individual firms in eleven U.S. industries. Our econometric framework exploits restrictions from dynamic theory and information from financial markets to generate quantitative evidence on the responsiveness of market power to inflation. We find that inflation usually has a positive effect on market power. This relation is heterogeneous across the eleven industries, and statistically significant positive relations are concentrated in industries with little market power.