ADJUSTMENT COSTS AND THE TRADE-OFF BETWEEN q AND LAGGED INVESTMENT EFFECTS

A dynamic investment model is estimated by system generalized method of moments using a panel data of Turkish firms quoted over the period 2004–2017. The sample is split using firm size and rate of investment criteria to classify firms according to how likely they face financing constraints and high adjustment costs. The q theory of investment is consistent with the data of large but low- investment firms in that q is the sufficient statistic for investment and the implied adjustment costs are of reasonable magnitude. The coefficient on q for these firms is 0.60 which is very large compared to previous studies possibly due to reducing measurement errors by using cash flow to instrument q. The sensitivity of investment to q reduces not only with financing constraints but also with high adjustment costs. There is a trade-off between q and lagged investment effects on investment. The more likely that a firm faces high adjustment costs, the more lagged investment becomes important for its current investment. However, the coefficient of lagged investment is not higher than 0.23 in any estimation suggesting that lagged investment is important only when the adjustment costs are very high.