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It is well documented that since at least the 1970s investment-cash flow (I-CF) sensitivity has been decreasing over time to disappear almost completely by the late 2000s. Based on a neoclassical investment model with costly external financing, we show that this pattern can be explained by the gradual increase of capital adjustment costs, attributable to the accumulation of knowledge capital. The result is robust to a variety of approaches, including Euler equation estimation and the simulated method of moments. More generally, our findings demonstrate that I-CF sensitivity should only be interpreted as a joint measure of financial and real frictions. [ABSTRACT FROM AUTHOR]

We develop a dynamic model of input–output networks that incorporates adjustment costs of changing inputs. Our closed-form solution for the dynamics of the economy shows that temporary shocks to upstream sectors, whose output travels through long supply chains, have disproportionately significant welfare impact compared to affected sectors' Domar weights. We conduct a spectral analysis of the U.S. production network and reveal that the welfare impact of temporary sectoral shocks can be represented by a low-dimensional, 3-factor structure. [ABSTRACT FROM AUTHOR]

Hysteresis, referring to the property of a system whereby some temporary shocks cause permanent effects, has showed to be important to explain the dynamics of aggregate employment. What is not yet addressed properly in the literature is the differentiation of hysteresis effects according to activity sectors. This subject is important in order to understand whether severe recessions, like the one that followed the COVID-19 pandemic with its recognized heterogeneous immediate effects at the sectoral level, have permanent effects, and prospectively for applying adequate stabilizing fiscal and monetary policies, and possibly other specific measures, to prevent excessive market shocks even if they are perceived to be temporary. For this purpose, we apply the play hysteresis model, which describes a dynamic process whereby non-convex adjustment costs create intervals of weak reaction of employment to forcing variables, and spurts in employment in reaction to large or cumulative small labour demand shocks. The model is implemented by means of a switching employment equation. The switching parameter is interpreted as an 'employment band of inaction' that summarizes the magnitude of the hysteretic effects. We have found significant hysteresis effects in the employment dynamics across sectors, and these are especially important for industry. [ABSTRACT FROM AUTHOR]

Summary: Is the typical specification of the Euler equation for investment employed in dynamic stochastic general equilibrium (DSGE) models consistent with aggregate macro data? The answer is yes using state‐of‐the‐art econometric methods that are robust to weak instruments and exploit information in possible structural changes. Unfortunately, however, there is very little information about the values of the parameters in aggregate data because investment is unresponsive to changes in capital utilization and the real interest rate. Bayesian estimation using fully specified DSGE models is more accurate due to both informative priors and cross‐equation restrictions. [ABSTRACT FROM AUTHOR]

We document that the relation between firm value and the use of takeover defenses is positive for young firms but becomes negative as firms age. This value reversal pattern reflects specific changes in the costs and benefits of takeover defenses as firms age and arises because defenses are sticky and rarely removed. Firms can attenuate the value reversal by removing defenses, but do so only when the defenses become very costly and adjustment costs are low. The value reversal explains previous mixed evidence about takeover defenses and implies that firm age proxies for takeover defenses' heterogeneous impacts on firm value. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

Using data from Chinese listed firms, we develop a measure of a firm's reliance on human capital that is based on its demand for highly educated employees. We find that a high reliance on human capital is linked to low corporate leverage, and this effect is more pronounced among firms at a high risk of human capital mobility and those facing high skilled‐labour adjustment costs. Our results indicate that firms strategically manage their capital structure to maintain financial flexibility, enabling them to effectively respond to the labour‐related costs associated with human capital losses and costly labour adjustments. [ABSTRACT FROM AUTHOR]

This article estimates dynamic productivity change and its components (i.e., technical inefficiency change, scale inefficiency change, and technical change) for a sample of ~700 US farm supply cooperatives over the 2005–2017 period. Estimation is undertaken using a directional distance function that accounts for the presence of adjustment costs associated with investments in quasi‐fixed factors of production. A bootstrap regression is then used to determine the factors affecting dynamic productivity change and its components. Results show that the sample cooperatives experienced a modest decline in productivity over the study period, on average. The analysis of productivity change decompositions suggests that productivity decline is mainly due to the negative contribution of technical inefficiency change. Results further reveal that ignoring adjustment costs when modeling cooperatives' performance leads to distortions in estimates of productivity and its components. The regression analysis results show that years of operation and a higher share of energy products in supply turnover are positively related to productivity change, technical inefficiency change, and scale inefficiency change. [EconLit Citations: Q12, D22, C61]. [ABSTRACT FROM AUTHOR]

Estimated impulse responses of investment and hiring typically peak well after the impact of a shock. Standard models with adjustment costs in capital and labor do not exhibit such delayed adjustment, but we argue that it arises naturally when we relax the assumption that the production technology is separable over time. This result, which holds for both convex and nonconvex cost functions, is strong enough to match the persistence observed in the data for reasonable parameter values. We discuss some evidence for our explanation and ways to test it. [ABSTRACT FROM AUTHOR]

I develop a continuous-time general equilibrium model with a continuum of states of the world and a continuum of agents endowed with heterogeneous beliefs. The model permits to analyze the interactions between financial markets and production. There is a single firm that faces convex adjustment costs and maximizes its terminal value. Equivalently, the firm uses decreasing returns to scale risk-return technology. The model is tractable and matches many of the empirical regularities in aggregate output and stock prices, such as a financial volatility that is higher than the macroeconomic volatility, skewness, kurtosis, short-term momentum, and volatility risk premium during recessions. All these aspects disappear when one assumes beliefs homogeneity or constant returns to scale. In particular, the impact of beliefs heterogeneity observed in endowment economies does not pertain when introducing production unless one assumes decreasing returns to scale in the risk-return technology. This paper was accepted by David Sraer, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4495. [ABSTRACT FROM AUTHOR]

This paper considers the predictions for factor demand of a two-sector vertically integrated model of firms producing output using firm-specific capital along with a second sector producing firm-specific capital that adapts raw capital purchased in the market. Analysts rarely observe each sector separately. Aggregating over both sectors produces short-run and long-run factor demand functions that appear to be perverse, but when disaggregated obey standard neoclassical properties. For example, a firm's response to a minimum wage could appear to violate the law of demand because it hires labor to install machines to replace the more expensive labor in the final output sector. Adjustment costs create the appearance of static inefficiency in the presence of dynamic efficiency. [ABSTRACT FROM AUTHOR]

I study the behavior of textile and clothing makers in the U.S. as they were exposed to a large, uncertainly anticipated increase in foreign competition through the removal of import quotas. I find a large secular decline in capital investment in the industries that are likely to have been the most vulnerable to such competition. The decline is significant beginning immediately after announcement of the policy–nine years before the scheduled liberalization date. The investment decline is interrupted by a large, short-lived increase when the policy uncertainty is resolved. I show that each of these features of the data is predicted by a model of optimal industry investment in the presence of capital adjustment costs, under an anticipated but uncertain demand shock that mimics this liberalization. Using industry-level panel data, I examine other developments in the output and capital markets for these industries, and I find that they too are consistent with the model's predictions. Calibration to fit the observed investment path yields parameter values that are close to directly estimated values. These findings demonstrate that considering capital adjustment costs and policy uncertainty can be critical in understanding industry behavior, even over a relatively long time horizon. [ABSTRACT FROM AUTHOR]

Purpose – This paper aims to weigh the restrictions to job creation imposed by labor market imperfections with respect to financial market imperfections. The authors want to see which restriction is more severe, and thus assess which is more powerful in creating permanent employment if it were removed. Design/methodology/approach – A structural estimation is performed. The policy rules of the dynamic programming model are integrated into a simulated maximum likelihood procedure by which the model parameters are recovered. Data come from the CBBE (Balance Sheet data from the Bank of Spain). Identification of key parameters comes mainly from the observation of debt variation and sluggish adjustment to permanent labor. Findings – Long-run permanent employment increases up to 69% when financial constraints are removed, whereas permanent employment only increases up to 54% when employment protection or firing costs are eliminated. The main finding of this paper is that the long-run expansion of permanent employment is larger when financial imperfections are removed than when firing costs are removed, even when there are important wage increases that moderate these employment expansions. Social implications – The removal of firing costs has been suggested by several economists as a result of the analysis of labor market imperfections. These policies, however, face the strong opposition of labor unions. This paper shows that the goals of permanent job creation can be accomplished without removing employment protection but by means of enhancing financial access to firms. Originality/value – The connection between financial constraints and employment has been studied in recent years, motivated by the Great Recession. However, there is no assessment of how financial and labor market imperfections compare with each other to restrict permanent job creation. This comparison is crucial for policy analysis. This study is an attempt to fill out this gap in the economic literature. No previous research has attempted to perform this very important comparison.

Despite the low participation rate of women in the labor market, the unemployment rate of women has increased significantly and has exceeded the unemployment rate of men in the last three decades. This paper focuses on the factors which affect labor demand considering gender using the data for the period 1986-2017. Based on the Multiple-Equation Generalized Method of Moments estimator, the results demonstrate that non-oil GDP has a positive and significant, and relative wages, capital-labor ratio, and labor costs–capital costs ratio have a negative and significant impact on labor demand by gender. The results of model estimation show that the speed of labor adjustment toward the desired level for female labor is slower compared to male labor. Furthermore, it is denoted that non-oil GDP affects labor demand positively with more impact on the female labor force. Other findings indicate that in the Iran’s labor market, male and female labors are substitutes hence, policies like wage subsidies for employing female labor force can stimulate female labor demand in a positive and significant way. On the other hand, as it is found that labor and capital are substitutes, policies that make labor more costly than capital may result in employment reduction. Finally, the technological progress that arises from increases in capital per capita has a negative and significant effect on both the female and male labor force.

The author considers influences of active regulation of operating costs and negative effects (shocks) on financial policy of the Russian public companies. The Russian firms make the choice for benefit of internal financing for the purpose of increase in the corporate benefit in the conditions of external financial restrictions (sectoral sanctions). Growth of the corporate benefit leads to increment of company assets and respectively to welfare of the shareholder. The Russian public companies will review the capital structure in the conditions of growth of adjustment costs. The active policy of the Russian companies is connected with availability of sufficient size of assets which are source of mortgage providing for regulation of capital structure. Thereby, the organization solves problem of adverse selection – financing source selection taking into account its price. The companies are forced to regulate actively the capital structure in the conditions of growth of operating costs and negative shocks. Regulation of capital structure is connected with the aspiration of the company to keep part of debt for its use as financing source. Operating costs are the indicator estimating efficiency of management decisions. The Russian companies will finance the investments, first of all, by internal financing sources. Cash flows are the resource servicing the investment capital. The firms will be attracted the loan capital in the period of deficit of cash flow. The Russian companies will work in logic of precautionary motive, creating monetary stock in the conditions of shocks. The precautionary motive is the protective buffer from negative impacts from the capital markets. Low values of cash flows allow to limit the management concerning his illegal behavior – decision making in private interests.

This study investigated temporal changes in factor adjustment of the Japanese manufacturing industry by applying a dynamic factor model, in which labor and capital were quasi-fixed to a panel of industries from 1972 to 2012. Estimations show that the adjustment speeds, with which factors approach their optimum levels, have increased over the period. Particularly, factor adjustment rates have significantly increased since 2000. The estimations suggest that Japanese manufacturers have become more flexible in hiring workers and faster in making investments, which reduces adjustment cost significantly. This dynamic gain is ignored from static analysis, underestimating the benefit of labor market reform. The study suggests that policymakers should consider dynamic factor adjustment in assessing policy impacts accurately when implementing an industrial policy.

The value of corporate cash holdings has increased significantly in recent decades. On average, $1 of cash is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. This increase is predominantly driven by the investment opportunity set and cash-flow volatility, as well as secular trends in product market competition, credit market risk, and within-firm diversification. We document a secular decrease in the speed of adjustment (SOA) in cash holdings, particularly for financially constrained firms with cash deficits, suggesting that capital market frictions can account for the trend in the value of cash holdings. [ABSTRACT FROM PUBLISHER]

In this article we look at how one specific form of temporary employment - employment with fixed-term contracts - fits into employers' hiring policies. We find that human capital variables, measured at the levels of the worker and the workplace, are important determinants of the employers' decisions to hire with temporary contracts and to promote temporary workers to permanent positions. Those employers that hire more with temporary contracts are also those that are more likely to offer a permanent position to their newly-hired temporary employees. Our results indicate that fixed-term contracts are a mechanism for screening workers for permanent positions. [ABSTRACT FROM AUTHOR]

Using a fractional dependent estimator (DPF) approach and 130,511 US firm‐year observations over the period 1970–2015, this paper examines the impact of drought risk on firms' capital structure and the adjustment speed of capital structure (SOA). We demonstrate that drought risk has negative effects on both leverage and the speed of leverage adjustment. We also find evidence of the spillover effect of drought on the adjustment speed of capital structure among firms operating in non‐water dependent industries. The effects are stronger for firms with no credit ratings. Interestingly, firms with strong cash flows can adjust their capital structure more quickly. Collectively, our findings suggest that climate risk in the form of drought not only affects firm risk but also the capital structure of firms, thereby highlighting that externality from climatic conditions are relevant to business operations and corporate polices. [ABSTRACT FROM AUTHOR]

Purpose – This study investigates the dynamic production structure of the Japanese manufacturing industry by using the adjustment cost approach. The study is to shed some light on the unique dynamic structure of the Japanese manufacturing industry. The study attempts to help design and predict industrial policies that are implemented to enhance domestic investments by the Japanese government. Design/methodology/approach – This study obtains a system of dynamic factor demand and output supply equations by applying the dual approach to the intertemporal value function as represented by the Hamilton–Jacobi equation. By using industrial panel data for 1973–2012 of the Japanese manufacturing industry, the study estimates the system of the behavioral equations and corresponding elasticities. The study uses hypothesis tests and dynamic elasticities to investigate the dynamic structure of the Japanese manufacturing industry. Findings – Estimation results show that labor and capital are quasi-fixed variables that adjust about 0.2 percent annually to the long-run optimum levels. Estimated adjustment rates are very slow as often presumed about the Japanese manufacturing industry, which uses lifetime employment practice and slow decision-making process in investment decisions. The results also show that output supply and factor demand elasticities vary greatly depending on time horizon. Factor demand increases when its own price increases in the short run, suggesting that factor adjustment is mostly determined factor prices in the past due to sluggish factor adjustment. However, factor demand becomes a normal downward-sloping curve in the long run as factor adjustment gets completed. Originality/value – Japanese manufacturing firms hire employees through lifetime contract to exploit the benefits of dynamic learning-by-doing and execute investments carefully considering all the possible impacts. Under the strategy, adjustment costs for changing workers and capital stock are minimized. Dynamic adjustment model is expected to shed some light on the unique dynamic structure of the Japanese manufacturing industry. However, researches regarding the dynamic factor adjustment of the Japanese manufacturing industry are hard to find. This study is expected to fill the research vacuum.

Ecological systems are dynamic and policies to manage them need to respond to that variation. However, policy adjustments will sometimes be costly, which means that fine-tuning a policy to track variability in the environment very tightly will only sometimes be worthwhile. We use a classic fisheries management problem, how to manage a stochastically varying population using annually varying quotas in order to maximize profit, to examine how costs of policy adjustment change optimal management recommendations. Costs of policy adjustment (changes in fishing quotas through time) could take different forms. For example, these costs may respond to the size of the change being implemented, or there could be a fixed cost any time a quota change is made. We show how different forms of policy costs have contrasting implications for optimal policies. Though it is frequently assumed that costs to adjusting policies will dampen variation in the policy, we show that certain cost structures can actually increase variation through time. We further show that failing to account for adjustment costs has a consistently worse economic impact than would assuming these costs are present when they are not.

It is widely recognized that aggregate employment dynamics is characterized by hysteresis. In the presence of hysteresis, the long run level of employment instead of being unique and history-independent, depends on the adjustment path that is taken, which includes the monetary and fiscal measures. It is thus important to study the presence of hysteresis in the macrodynamics of employment to understand whether the recession followed 2007s financial crisis will have permanent effects, and prospectively to conduct fiscal and monetary policies. The main contribution of this paper is to analyse the relative impact of the main sources hysteresis (non-convex adjustment costs, uncertainty and the flexibility of working time arrangements) to the width of the employment band of inaction. For that purpose, a switching employment equation was estimated from a computational implementation of the linear play model of hysteresis. From our results we found significant hysteresis effects in the aggregate employment dynamics caused by the presence of non-convex adjustment costs as uncertainty. We also found that the flexibility firms may have to adjust labour input by varying the number of hours of work per employee helps to mitigate the effect of uncertainty upon the band of inaction. [ABSTRACT FROM AUTHOR]

This study investigated temporal changes in factor adjustment of the Japanese manufacturing industry by applying a dynamic factor model, in which labor and capital were quasi-fixed to a panel of industries from 1972 to 2012. Estimations show that the adjustment speeds, with which factors approach their optimum levels, have increased over the period. Particularly, factor adjustment rates have significantly increased since 2000. The estimations suggest that Japanese manufacturers have become more flexible in hiring workers and faster in making investments, which reduces adjustment cost significantly. This dynamic gain is ignored from static analysis, underestimating the benefit of labor market reform. The study suggests that policymakers should consider dynamic factor adjustment in assessing policy impacts accurately when implementing an industrial policy. [ABSTRACT FROM AUTHOR]

Through employing a quantile regression approach and a dataset of 206,046 firm‐year observations over the period 1970–2017 in the United States market, we examine the heterogeneity and asymmetry in the speed of adjustment (SOA) towards target leverage. We document that high‐ and low‐levered firms adjust more quickly towards their target levels than do mid‐levered firms. This holds true when total leverage and long‐term leverage are considered in the analysis. Second, there is a difference in SOA between low‐ and high‐levered firms, which points to SOA skewness. Third, when short‐term leverage is considered in the analysis, the adjustment speed becomes smaller at varying levels of short‐term debts. Finally, empirical evidence from total leverage and long‐term leverage adjustments is consistent with the trade‐off theory, whereas empirical evidence from short‐term debt adjustments supports the pecking order theory. [ABSTRACT FROM AUTHOR]

The highly-educated labor force unemployment rate rapidly overtook the unemployment rate of the less-educated workers for the last two decades. This paper focuses on the factors which affect labor demand considering the level of education using the data from 1986 to 2017. Results based on the Multiple-Equation Generalized Method of Moments estimator demonstrate that non-oil GDP, relative wages, capital-labor ratio, and labor costs–capital costs ratio have a significant impact on labor demand in terms of education level. Also, it is demonstrated that the highly-educated labor force can adjust to its desired level at a slower pace than the less educated workforce. Furthermore, it is denoted that non-oil GDP affects labor demand in a positive and significant way with more impact on the workers with higher education. Other findings indicate that in Iran’s labor market, highly-educated labor force and workers without college/university degree are substitutes, hence policies like wage subsidies and employer insurance exemption for employing higher education graduates can stimulate labor demand for a highly-educated workforce in a positive and significant manner. On the other hand, as it is found that labor and capital are substitutes, policies that make labor costlier than capital may result in employment reduction. Finally, the technological progress that arises from increases in capital per capita has a positive and significant effect on the labor force with higher education, but it influences less-educated labor employment negatively and significantly.

In this paper, the extended Resource Renting Problem (RRP/extended) is presented. The RRP/extended is a time-constrained project scheduling problem, in which the total project cost is minimised. In the RRP/extended, this total project cost is determined by a number of extra costs, which are defined in this paper. These costs are based on the costs that are used in the traditional Resource Renting Problem and the Total Adjustment Cost Problem. Therefore, the RRP/extended represents a union of these two problems. To solve the RRP/extended, a scatter search is developed. The building blocks of this scatter search are specifically designed for the RRP/extended. We introduce two crossovers and an improvement method. The efficiency of these building blocks will be shown in the paper. Furthermore, a sensitivity analysis is presented in which the five costs have diverse values. [ABSTRACT FROM AUTHOR]

This paper investigates the sources of capital misallocation across a group of developing and developed countries, using the empirical methodology developed in David and Venkateswaran (2019. "The Sources of Capital Misallocation." American Economic Review 109 (7): 2531–67). The main findings are: (i) technological frictions—namely, adjustment costs and uncertainty—account for only a modest share of the observed misallocation; (ii) heterogeneity in firm-level technologies potentially explains between one-quarter and one-half, but (iii) dispersion in markups is much smaller; (iv) after accounting for these factors, on average, at least 50 percent of misallocation within each country remains unexplained, suggesting a large role for additional—potentially distortionary—factors. These factors are largely attributable to a component that is correlated with firm size/productivity and one that is essentially permanent to the firm. They exhibit strong negative correlations with income per capita and direct measures of the quality of the business environment from the World Bank Doing Business Report. The paper reports a broad set of moments describing firm-level investment dynamics and detailed parameter estimates on a country-by-country basis with an eye towards future work in this area. [ABSTRACT FROM AUTHOR]

Firms' investment in information technology (IT) has been widely considered to be a key enabler of innovation. In this study, we integrate prior findings on the augmenting pathways (where IT investment supports innovation) with a new theory explaining the suppressing pathways (where dynamic adjustment costs associated with large IT investment can be detrimental to innovation) to propose an overall inverted U-shaped relationship between IT investment and commercialized innovation performance (CIP). To test our theory, we analyze a unique panel dataset from the largest economy in Europe and discovered a curvilinear relationship between IT investment and CIP for firms across a broad spectrum of industries. Our research presents empirical evidence corroborating the augmenting and suppressing pathways linking IT investment and CIP. Our findings serve as a cautionary signal to executives, discouraging overinvestment in IT. [ABSTRACT FROM AUTHOR]

Basu's ["The Conservatism Principle and the Asymmetric Timeliness of Earnings." Journal of Accounting and Economics 24 (1997): 3–37] measurement of conditional conservatism as the asymmetric timeliness of earnings underlies hundreds of studies. However, many subsequent studies cast doubt on the extent to which Basu's measure captures conditional conservatism versus statistical biases or alternative constructs (collectively, "biases"), thereby questioning the validity of the inferences that empirical researchers draw from analyses using the measure. We modify Basu's measure in four simple ways to remove these biases. Our key modification is the inclusion of interactive controls for return variance, a volatility proxy that captures Patatoukas and Thomas' ["More Evidence of Bias in Differential Timeliness Estimates of Conditional Conservatism." The Accounting Review 86 (2011): 1765–1794] return variance effect and various sources of economic optionality and adjustment costs. This inclusion captures volatility‐related effects on both the level of earnings and the sensitivity of earnings to returns, and it allows the magnitudes of these effects to vary with the sign of returns. We conduct validation analyses using placebo‐dependent variables, synthetic returns, and nonconditionally conservative earnings components that show our modified Basu measure is largely free of known biases. We further show that our measure is associated with contracting and other economic variables as predicted by theory. Our findings suggest that researchers can rely on our modified Basu measure to identify the determinants and effects of conditional conservatism. [ABSTRACT FROM AUTHOR]