Technological Heterogeneity and Corporate Investment

We study a dynamic model of corporate investment with fixed and convex capital adjustment costs, and estimate the parameters of the model separately for each firm in a sample of U.S. companies. We evaluate empirically the degree of parameter heterogeneity among firms; quantify the cross-sectional distribution of capital adjustment costs; and assess the magnitude of the estimation bias when one assumes that firms are characterized by a homogeneous set of parameter values. The results show that a considerable amount of parameter heterogeneity exists across firms. Average fixed adjustment costs are 1.15% of the firm's capital, they account for the majority of total adjustment costs, and they are underestimated when assuming parameter homogeneity across firms. Adjustment costs decline with firm size, and convex adjustment costs are positively related to a firm's average merger and acquisition expenditure.