Abstract

In this paper a model based on the Euler equation of optimal capital accumulation
in the presence of convex adjustment costs is developed and estimated. The
theoretical model explicitly allows for differential financial status across firms.
The empirical analysis uses Romanian manufacturing firm panel data to estimate
dynamic investment models with the generalized method of moments (GMM-IV)
technique and tests the derived hypotheses. The results indicate that the model
based on the perfect market assumptions is rejected. The version of the model that
allows for differential financial status of firms by using a theoretically derived
sample selection rule is not rejected by the data. Controlling for soft budget
constraints, common for transition economies, further improves the performance
of the model.