Investment–uncertainty relationship: differences between intangible and physical capital

This paper disentangles the effects of uncertainty in explaining the heterogeneity of firms’ investments. In particular, following Bloom [2007. “Uncertainty and the Dynamics of R&D.” American Economic Review 97 (2): 250–255], we test the role of uncertainty and liquidity constraints extending the model to include R&D, non-R&D intangibles, as well as physical capital. The analysis is performed on a large data set of Italian firms, covering both manufacturing and services sectors, as well as large and small firms. We show that non-convex adjustment costs affect different capital inputs in different ways, depending on their degree of firm-specificity. The results confirm the Bloom model: flow adjustment costs explain investment in R&D and, to a lesser extent, in non-R&D intangibles. However, it struggles to explain tangible investment plans because of the ambiguous effect of the stock adjustment costs

Is financial leverage mean-reverting? Unit root tests and corporate financing models

In this paper we use the unit root test at both individual company (Dickey-Fuller) and panel (Im-Pesaran-Shin) level, in order to provide some quantitative evidence of the univariate behaviour of Italian companies’ debt-ratio. If it is mean-reverting, then at least a share of companies are going to behave according to the trade-off model, whereas if it is non-stationary, then companies may behave according to pecking order theory. Individual company test results support the pecking order theory in the case of more than 80% of firms, while the panel test rejects the unit root null. These contradictory results can be explained by the heterogeneity of the firms which tends to characterise the entire panel. For this reason, we selected a number of sub-samples in which companies are supposed to follow either the pure trade-off or the pure pecking order model of behaviour. Results confirm that: a) heterogeneity may lead to a false rejection of the pecking order theory in panel unit root tests; b) both trade-off and pecking order theories contribute towards explaining the financial behaviour of Italian companies; c) the testing procedure we propose has the power to reject the pure pecking order model under the null hypothesis, but not the pure trade-off model

GMM-lev estimation and individual heterogeneity: Monte Carlo evidence and empirical applications

We introduce a new estimator, CRE-GMM, which exploits the correlated random effects (CRE) approach within the generalised method of moments (GMM), specifically applied to level equations, GMM-lev. It has the advantage of estimating the effect of measurable time-invariant covariates using all available information. This is not possible with GMM-dif, applied to the equations of each period transformed into first differences, while GMM-sys uses little information as it adds the equation in levels for only one period. The GMM-lev, by implying a two-component error term containing individual heterogeneity and shock, exposes the explanatory variables to possible double endogeneity. For example, the estimation of actual persistence could suffer from bias if instruments were correlated with the unit-specific error component. The CRE-GMM deals with double endogeneity, captures initial conditions and enhance inference. Monte Carlo simulations for different panel types and under different double endogeneity assumptions show the advantage of our approach. The empirical applications on production and R&D contribute to clarify the advantages of using CRE-GMM

Intangible Capital and Productivity: An Exploration on a Panel of Italian Manufacturing Firms

The paper examines the size and productivity of total intangible capital relative to total tangible capital for a large panel of Italian Manufacturing firms. In the analysis, we decompose total intangibles in two different ways: in intangibles expensed in firms' current accounts (as usually considered in empirical studies) versus intangible capitalized in firms' balance sheets (usually not considered); and in "intellectual capital" (i.e. R&D expenditures, and patenting and related costs) versus "customer capital" (i.e., advertising expenditure, and trademarks and related costs). We systematically assess the robustness of our results by using different specifications of the production functions implying different elasticities of substitution between tangible and intangible capital, and comparing different panel data estimates. Our results underscore that firms' accounting information on intangible investments is genuinely informative, showing that intangible capital and its different components are at least as productive as tangible capital.

Market Power and Duration of R&D Investment in a Panel of Italian Firms

Studies about innovation find evidence of a positive relationship between technological advancement and firm performance, in particular when the innovative effort is continuous. This paper aims to further the analysis on the duration of R&D investment at the firm level. The contribution of this study is threefold: first, we extend Máñez et al. [2014], Triguero et al. [2014] analysis for Spain to the Italian case: we use a panel of manufacturing and service companies, thus enlarging the view of R&D duration within the European countries. Secondly, from a methodological point of view, we employ both discrete- and continuous-time duration models, in order to test the Proportional Hazards (PH) assumption, i.e. the assumption that the hazard rate is equivalent over time across groups. Last, but not least, we assess whether a firm’s likelihood of continuing investment in R&D depends on the market power of companies. We test alternative measures for market power: the classical price-cost margin and a new proxy for the firm demand elasticity, obtained from a specific survey question. Results are in line with the hypothesis that R&D presents considerable temporal spill overs and strong persistence, even once unobserved heterogeneity is controlled for. Also, we argue that the appropriate proxy for market power is the firm demand elasticity, and we find support for the Schumpeterian hypothesis

A New Index of Uncertainty Based on Internet Searches: A Friend or Foe of Other Indicators?

The preliminary evidence in the literature suggests that changes in uncertainty have a role in shaping the U.S. economic cycle. But what is effectively measured by the different available indicators of uncertainty still remains an "uncertain" issue. This paper has two aims: (i) to introduce a new uncertainty indicator (GT) based on Internet searches; and (ii) to compare the main features and the macroeconomic effects of alternative measures of uncertainty, including our own. Results suggest that GT shocks embody timely information about people's perception of uncertainty and, in some cases, earlier than other indexes. Furthermore, the effect of uncertainty shocks on output is more influenced by parameter breaks due to insample events than by model specification. The consequence is that an all-comprehensive indicator able to weight different sources of uncertainty is preferable

Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity

Understanding the dynamics of the leverage ratio is at the heart of the empirical research about firms' capital structure, as they can be very different under alternative theoretical models. The pillars of almost all empirical applications are the maintained assumptions of poolability and stationarity, which are motivated by the need of model’s simplicity and treatability, rather than being based on an empirical ground. In this paper we provide robust evidence of non-stationarity for a significantly large share of US firms' debt ratios and of strong heterogeneity in the speeds at which firms adjust towards their targets. These results stimulate new directions of the empirical research on debt ratio dynamics by relying more on the concept of heterogeneous degree of leverage persistence

Corporate taxation and its reform: the effects on corporate financing decisions in Italy

The aim of this paper is twofold. First, we measure the relationship between fiscal variables and companies debt choices in Italy using a dynamic representation of the modified pecking order model, where both trade-off and pecking order theories are nested. Second, our estimation results are used, jointly with some tax simulations undertaken with a company microsimulation tax-model (MATÍS), to assess the effects on leverage of two recent tax reforms in Italy since 1996. Main results suggest that: (a) fiscal effects are significant and robust explanations of firms’ financial behaviour; (b) the reforms analysed are able to induce similar reductions in firms’ leverage, when compared with the situation prevailing in 1996. However, the routes through which this occurs are different (relative price in the first case, cash flow in the second), tracing some important differences in the overall evaluation of the two reforms

The changing relationship between inflation and the economic cycle in Italy: 1861\u20132012

The article investigates the relationship between GDP and prices in Italy in the long-run, from the country's Unification (1861) up to present day. By using the new national accounts data, over the period 1861\u20132012, we were able to make Italy the third country to have a historical test of the hybrid Phillips curve (in which both the new Keynesian and the backward-looking Phillips curves are tested), together with the UK and the US. How do economic growth and prices interact in Italy's different stages of economic growth? Unlike the US and the UK, where said interaction was already operating in mid-19th century, in Italy the link between inflation and the economic cycle emerged only after the First World War. We argue that this can be explained owing to Italy's different position in the international economic system and the way foreign conditioning factors (the exchange-rate regime and innovation in transportation) influenced the Italian industrialization. Before the First World War, deflation was imported. This turned out to be compatible with some GDP growth, insofar as the deflationist macroeconomic setting favoured capital inflows and technological upgrading. Whereas, from the First World War until the creation of a common European currency, price variations were mainly a consequence of national policies and domestic conditions: the trade-off with the GDP cycle is now manifest, both in the periods of deflation (the interwar years) and in those of inflation (the second half of the twentieth century). Our findings may also have important implications for present day, since price movements are once again, as in the liberal age, largely imported

Measuring Economic Uncertainty for Poland

Measuring economic uncertainty is challenging, but it is important for policymakers to address it, especially in countries for which there are virtually no uncertainty indices. This article proposes an index of economic uncertainty for Poland, EURQPL, based on Internet searches for specific terms to capture the level of uncertainty perceived by Internet-using economic agents. Compared to Bontempi et al. (2021) who analysed the US and Italy, the change of country, the use of either Polish or English in the definition of queries and the creation of regional indices offer interesting insights. The national index peaks at times commonly considered uncertain, such as the financial crisis and the coronavirus pandemic. Compared to the EURQ for the US and Italy, our index has a significant peak due to the teachers’ strike, a shock not reported in the literature. Particularly relevant are the terms related to social security and fiscal policy; uncertainty shocks have persistent effects on unemployment. Besides confirming how successfully Internet searches can be exploited in economic research, we highlight how regional indices can be used to study the impact of uncertainty on local economies