The Review of Economics and Statistics Vol. 70 No. 4 1988
Capital Intensity and the Firm's Cost of Capital
Abstract
Recent reports of negative capital intensity coefficients in struct ure-performance equations support allegations of gross measurement error in accounting-based measures of economic profitability. This paper explores whether specification errors, rather than measurement errors alone, may explain this anomalous empirical result. Within a simultaneous equations model of capital intensity, cost of capital, and price-cost margins, the author employs Hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm-specific cost of capital from price-cost margin equations. The roles of cost of capital and capital intensity are derived from formal structure-performance theory.
- DOI
- 10.2307/1935821
- Volume
- 70
- Issue
- 4
- Pages
- 587
- Sources
- openalex crossref