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Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric

Livdan, Dmitry and Nezlobin, Alexander (2021) Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric. Journal of Financial Economics. ISSN 0304-405X

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Identification Number: 10.1016/j.jfineco.2021.05.021

Abstract

This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm’s capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm’s investment history. If capital goods have constant efficiency over a finite useful life, then simple proxies are readily available for both the replacement cost of assets in place and capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We then show that these components exhibit significantly different economic determinants and behavior.

Item Type: Article
Official URL: https://www.sciencedirect.com/science/journal/0304...
Additional Information: © 2021 Elsevier B.V.
Divisions: Accounting
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior
D - Microeconomics > D2 - Production and Organizations > D24 - Production; Cost; Capital and Total Factor Productivity; Capacity
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited: 11 Feb 2021 08:30
Last Modified: 20 Sep 2021 10:54
URI: http://eprints.lse.ac.uk/id/eprint/108639

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