Financial Frictions and Investment Dynamics in Multi-Plant Firms
32 Pages Posted: 26 Jan 2014
Date Written: November 1, 2013
Using confidential Census data on U.S. manufacturing plants, we document that most of the dispersion in investment rates across plants occurs within firms instead of across firms. Between firm dispersion is almost acyclical, but within-firm dispersion is strongly procyclical. To investigate the role of firms in the allocation of capital in the economy, we build a multi-plant model of the firm with frictions at both levels of aggregation. We show that external financing constraints at the level of the firm can have important implications for plant-level investment dynamics. Finally, we present empirical evidence supporting the predictions of the model.
Keywords: Investment, Plants vs. Firms, Q-Theory
JEL Classification: E2, G3
Suggested Citation: Suggested Citation