Econometric Analysis of Irreversible Investment with Financial Constraints: Comparison of Parametric and Semiparametric Estimations

This analysis investigates irreversible investment with financial constraints by parametric and semiparametric estimations. The analysis examines four U.S. industries, employing a sample selection model as it develops its econometric model in accordance with real options theory. The analysis finds that liquidity positively affects capital investment, which is compatible with the theory. In addition, while investment is insensitive to sales revenue and operating costs, capital stock negatively affects investment. The analysis also finds that the sample selection bias is large and that a biased OLS estimator underestimates the coefficients of interest. The analysis’ model selection is inconclusive.