Adjustment costs, financial frictions and aggregate investment

We develop a simple theoretical model of investment under the assumption that financial frictions generate adjustment costs different from those of industrial origin that are normally discussed inthe literature. We identify several restrictions that are used to testand estimate the model using aggregate data for the United States. We find strong evidence that adjustment costs on external financeare significant. We then investigate whether the availability ofexternal finance affects investment of non-financial corporations. We find that a strong relationship holds between financial flows and investment. Shocks to investment have a persistent impacton external finance, whereas the impact on investment of externalfinance shocks is less persistent. (C) 2014 Elsevier Inc. All rights reserved.