Knowledge that Transforms

-This paper develops estimates of the internal costs (measured in terms of foregone current output) associated with the introduction of new plant and equipment into manufacturing establishments, using the Census Bureau's Longitudinal Establishment Data file, a very large and rich source of production and investment data. Our estimates provide strong support for the internal-adjustment-costs hypothesis; they indicate that one-dollar increases in expansion and replacement investment cause, on the average, 35and 21-cent reductions, respectively, in current output. The internal cost of adjusting to equipment appears to be higher than the cost of adjusting to plant.

L. G. Godfrey, Michael McAleer, C. R. McKenzie, Variable Addition and Lagrange Multiplier Tests for Linear and Logarithmic Regression Models, The Review of Economics and Statistics, Vol. 70, No. 3 (Aug., 1988), pp. 492-503

A dynamic model of corporate balance sheet structures and net worth growth is fit to firm-level panel data from Uruguay. Basic findings are: (1) net income is very sensitive to financial costs and demand for output; (2) there is a direct proportionality between net income and net worth expansion; (3) firms absorb most short-run fluctuations in net worth via adjustments in assets, not debts; and (4) the interest elasticity of corporate demand for peso debt is very small. Inter alia, these results imply that rapid changes in the exchange rate have large effects on corporate sector leverage and liquidity.

Feliciano Hernandez Iglesias, Michelle Riboud, Intergenerational Effects on Fertility Behavior and Earnings Mobility in Spain, The Review of Economics and Statistics, Vol. 70, No. 2 (May, 1988), pp. 253-258

Andrew F. Daughety, Forrest D. Nelson, An Econometric Analysis of Changes in the Cost and Production Structure of the Trucking Industry, 1953-1982, The Review of Economics and Statistics, Vol. 70, No. 1 (Feb., 1988), pp. 67-75

The ratio of a firm's market value to its replace ment cost, q, is often used to measure firms' profitability. The use of q is increasin g in large part because of the growing realization that errors in evaluating firms' capital assets may cause errors in estimates of the accounting rate of return, r. The same objection, however, applies t o q. This paper reports the results of Monte Carlo experiments designed to determine whether q is superior to r. Errors in both q and r are large and potentially serious, but do not render either measure useless.