An econometric study on the investment behaviour of the Greek manufacturing sector.
In this thesis, the results are presented of an econometric study, which applies
several quarterly and annual Greek macroeconomic time series on four of the best
known models of investment: the Neoclassical Stock Adjustment; the Real Net Rate
of Return; the Return Over Cost and the Cost of Adjustment-Tobin's q models.
Although in various studies these models are heavily criticised, the empirical
results of this study show that each of them provides a certain contribution to the
identification of the determinants of investment spending. However, none of the
individual models appears to explain the investment function entirely. The major
reasons for this deficiency are found in the shortcomings of the theoretical models
themselves, in the volatile nature of the investment function, and last but not least
in the inconstant quality, incompatibility and limitations of the available data.
The study's results determine the price variables as very significant factors for
the decision of a firm whether or not to invest. They include:
• the user cost of capital, mainly through the interest rate components: the long
term lending rate and the real interest rate,
• the rate of return on capital,
• the difference between prospective and actual costs of funds,
• the ratio of a firm's market value to the replacement cost of its assets.
Another interesting finding of the present study is that the output produced
affects the fixed capital formation according to the role that the applied theoretical
model attributes to it:
• when it represents demand forces in the product market in the neoclassical
model, influences investment with high long-run and short-run elasticities, while
conditionally to seasonality in the short-run,
• when it expresses the level of capacity utilization in the net rate of return and
the return over cost models, affects investment significantly but with a low
• when it shows the firm's power in its product market in Tobin's q model, has a
marginal impact on the investment rate.
Finally, it is found that investment expenditure is positively affected by the
availability of the firm's internally generated funds; when external funds are
required, firms are highly dependent on borrowing facilities offered by the banking