How do frictions affect corporate investment?: a structural approach

We propose a new structural approach to test investment equations, based on the log likelihood function of the optimal investment policy of a Q-theory model with real and financing frictions. We find that investment and external financing issues are weakly concave in average Q, and weakly convex in cashflows. We quantify jointly the marginal costs of investment, fixed costs of investment, and marginal costs of external financing of US public firms. We find that financing constraints affect firms' marginal product of capital. We find that firms' real and financing frictions across industries are significantly related to the industrial production technology. We also provide a simple methodology to construct proxies for firms' marginal product of capital, marginal costs of investment, and marginal costs of external financing.