Extensive and Intensive Investment over the Business Cycle

Abstract

Investment of US firms responds asymmetrically to Tobin’s Q : investment of established firms—“intensive” investment—reacts negatively to Q whereas investment of new firms—“extensive” investment—responds positively and elastically to Q . This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q .