NON-LINEAR RESPONSE OF FIRM INVESTMENT TO Q: EVIDENCE FROM GREEK LISTED FIRMS

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Abstract

A dynamic-panel model is applied in order to empirically investigate the relationship between business fixed investment and Tobin’s q for the firms listed in the Athens Stock Exchange (ASE). In particular, we search for non-linearities in the underlying relationship between investment and fundamentals, consistent with the presence of multiple regimes. The empirical results support a discontinuity identifying two-regimes: (a) wherein the first (for values of q below a certain threshold) investment is inelastic to q, while in the second it exhibits a positive relationship, and b) a further non-linearity expressed in a concavity of the investment- q relationship implying that for the segment where investment reacts to fundamentals positively, it does so at a decreasing rate evidence which is consistent with the presence of non-convexities in adjustment costs.

Keywords: Investment, Non-linearities, Panel Data, Tobin’s q

Received: 21.12.2018
Accepted: 13.02.2019
Published online: 21.02.2019

JEL Classification: C33; E22; G31

How to cite this paper: Kallandranis, C. (2019). Non-linear response of firm investment to q: Evidence from Greek listed firms. Risk Governance and Control: Financial Markets & Institutions, 9(1), 53-63. https://doi.org/10.22495/rgcv9i1p5