INTERNATIONAL EVIDENCE ON INVESTMENT AND FUNDAMENTALS

If a firm's costs of installing capital are not quadratic, then its op timal investment is not a linear function of fundamentals, such as the returns and costs of capital. This study specifies a model in which a firm may face fixed, linear, and convex costs of investing, and estim ates the resulting investment function using firm-level data from 11 c ountries. The evidence suggests important nonlinearities, consistent w ith the presence of fixed or other non-quadratic costs, in the relatio nship between investment and fundamentals for most countries. These fi ndings are statistically significant at the level of the firm, and eco nomically significant when aggregated by country. (C) 1997 Elsevier Sc ience B.V.