Investment, Capital Stock, and Replacement Cost of Assets when Economic Depreciation is Non-Geometric

62 Pages Posted: 19 Oct 2017 Last revised: 30 Dec 2020

See all articles by Dmitry Livdan

Dmitry Livdan

University of California, Berkeley

Alexander Nezlobin

London School of Economics & Political Science (LSE) - London School of Economics

Date Written: November 21, 2020

Abstract

This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm's capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm's investment history. If capital goods have constant efficiency over a finite useful life, then simple proxies are readily available for both the replacement cost of assets in place and capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We then show that these components exhibit significantly different economic determinants and behavior.

Keywords: Investment; Tobin's Q; Vintage Capital; Capital Stock; Replacement Cost of Assets

JEL Classification: E22, G31

Suggested Citation

Livdan, Dmitry and Nezlobin, Alexander, Investment, Capital Stock, and Replacement Cost of Assets when Economic Depreciation is Non-Geometric (November 21, 2020). Available at SSRN: https://ssrn.com/abstract=3055461 or http://dx.doi.org/10.2139/ssrn.3055461

Dmitry Livdan (Contact Author)

University of California, Berkeley ( email )

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Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Alexander Nezlobin

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

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